Risk Goes Up On B&C Loans
The default risk on newly originated nonprime mortgage loans "remains at elevated levels," according to a quarterly report from University Financial Associates.
And the risk has risen by over 30% since 1998 as a result of a slowing economy, according to the report.
"The risk is rising because the accommodating interest rate policy of the Fed is not sufficient to offset the eroding prospects for both the consumer and the underlying housing collateral," said Dennis Capozza, professor of finance at the University of Michigan and a principal at UFA.
The Nonprime Mortgage Report default risk index for the fall of 2002 rose to 104 from a revised reading of 102 the previous quarter, but unchanged from two quarters earlier, UFA said. That means subprime lenders should expect defaults on loans currently being originated to be 30% higher than the average of loans originated in 1998 and 1999 and 4% higher than the average rate on mortgages originated during the decade of the 1990s as a whole.
UFA's analysis is based on a "constant quality" loan scenario, meaning it is intended to project the default risk on a loan with the same borrower, loan and collateral characteristics. The index reflects only the impact that changes in economic conditions will have on default trends.
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