Expected Defaults Edge Higher

Under current economic conditions, nonprime investors and lenders should expect defaults on loans currently being originated to be 137% higher than the average of loans originated in the 1990s, according to the latest UFA Mortgage Report. The Default Risk Index from the University Financial Associates in Ann Arbor, Mich., for the third quarter of 2009 rose to 237 from last quarter's revised 230, but remains below the 2008 Q4 peak. After extraordinary price declines in many housing markets around the country, the UFA says steep increases in unemployment are almost fully offsetting the positive effects of lower, and in some areas, stabilizing house prices. "As house prices return to more sustainable levels, we are transitioning to a phase where high unemployment rates will exacerbate the level and extend the period of elevated foreclosures," said Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA.