Americans' Default Risk Seen as Still High But Improving

Although 20% of U.S. mortgages are currently under water, Americans' risk of defaulting on their home loans is at its lowest point since 2005, according to an executive and academic expert at a risk-management firm. "Although house prices will continue to decline, the rate of decline has decelerated," said Dennis Capozza, founding principal of University Financial Associates and a professor of finance and real estate at the University of Michigan's Ross School of Business. "The hardest-hit areas have begun to return to sustainable levels," he said. "Slower house price depreciation will mitigate risk levels for mortgage lenders." The UFA Default Risk Index, which measures the risk of default on newly originated prime and nonprime credit mortgages by tracking local and national economic conditions, has fallen to 158 for the first quarter 2010. This is down from last quarter's 164. The index represents a comparison with the average from the 1990s, represented by 100. "Thus, the worst-case risk of default on home loans is 1.58 times (or 58%) higher than the average of the 1990s," according to UFA, which noted that this peaked at 330 in 2007.