Foreclosures Not At Bay Yet

Ann Arbor, MI-Recent data from various reports show the amount of defaulted loans and foreclosures appear at bay, fueling some hope that the long-expected ease of the crisis has taken off.

Or has it, skeptics would ask.

The most recent Mortgage Bankers Association delinquency survey of the fourth quarter 2008 showed the national mortgage delinquency rate among prime and subprime mortgages climbed to a record 7.88% in the fourth quarter with subprime late payments reaching a staggering 21.88%.

The University Financial Associates Default Risk Index for the first quarter of 2009 fell to 201 from last quarter's revised 209.

Moreover, University Financial Associates said it marks the second quarter of decline in a row and "a hopeful sign that the tsunami of foreclosures may be cresting." UFA here maintains that the elevated level of the index reflects rapidly eroding economic conditions and also a revision to include a recession scenario in 2009.

The recession scenario, however, UFA notes, "optimistically assumes that the Obama policy initiatives will be able to stem this wave of defaults."

In other words, there is a significant degree of subjectivity attached to the default risk index findings.

The key finding of the latest UFA Mortgage Report by University Financial Associates index shows that under current economic conditions, investors and lenders should expect life-of-loan defaults on loans originated today to be 101% higher than the average of loans originated in the 1990s.

"All the recent data show signs of shipwreck, as the tsunami generated by the mortgage crisis travels in waves through the world economy," said Dennis Capozza, professor of finance with the Ross School of business at the University of Michigan and a founding principal of UFA.

"In the fourth quarter of 2008, consumer and business spending collapsed, causing unemployment to rise steeply. The severe damage to balance sheets from falling asset prices is taking its toll. Until this storm stops raging, we won't be able to assess the extent of the damage."

The UFA Default Risk Index measures default risk on newly originated nonprime mortgages and reflects only the changes in current and expected future economic conditions, which continue to be much less favorable compared to the recent past.