B&C Default Risk Remains at High Level

The risk of mortgage default on nonprime credit quality loans has risen 30% since 1998, according to a quarterly study by University Financial Associates.

Dennis Cappoza, professor of finance at the University of Michigan and a principal in University Financial Associates, said the risk of default on nonprime loans being originated today is rising because of economic conditions.

The Federal Reserve's accommodating interest rate policy is not able to "offset the eroding prospects for both the consumer and the underlying housing collateral," he said.

In the winter of 2003, the UFA's nonprime default risk index rose to 105, from a revised reading of 103 in the fall.

That means B&C lenders should expect defaults on loans currently being originated to be 30% higher than the average of loans originated in 1998 and 1999, when credit quality was comparably strong.

Defaults on new loans should be 5% higher than the average experienced on mortgages originated during the entire decade of the 1990s.

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