Default Risk, Housing Recovery Still in Transition Mode

Data indicate atypical economic conditions at the local and national level will lead to atypical new delinquency rates that are bound to slow down the housing market recovery during the rest of 2013.

The spring mortgage report of the University Financial Associates of Ann Arbor, Mich., shows residential mortgage default risk for all vintages “is getting very close to the average of the 1990s.”

The UFA Default Risk Index for the second quarter is 106, up from the revised 97 of the first quarter.

Findings indicate investors and lenders should expect defaults on new prime and nonprime loan originations to be 6% higher than the average default rate of loans originated in the 1990s, but much less than the worst vintages of the 2006-2008 cycle.

Mortgage risk dropped to the lowest level in almost 10 years, compared tothe UFA Default Risk Index Constant Quality Loan by vintage for 1990-2000, which averaged 100.

Nonetheless, says Dennis Capozza, the Dale Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA, “We may not be able to declare the mortgage crisis over yet.”

Capozza warns that although these default risk estimations on newly originated mortgages are similar to the 100 average of the 1990s, the current housing market situation “is not typical or normal.”

As with most recoveries, he argues, the market is now going through “a short, transitional period.”

In the current situation, it means since very low mortgage rates and accommodative monetary policy continue to offset “the negative effect of high unemployment rates,” creating a not normal environment.