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Bright Outlook for Defaults

University of Michigan report indicates mortgage default risk down

Dec. 23, 2010

By MortgageDaily.com staff


An improving economy and stabilizing housing market has one business school predicting that this year's originations have a lower risk of defaulting than loans originated in recent years.

The risk of default on residential loans fell again this quarter, according to the UFA Default Risk Index released Thursday from the University of Michigan's Ross School of Business. The index came in at 143.

It was the lowest level in more than five years for the index, which measures the risk of default on newly originated prime and nonprime mortgages. The index level suggests that mortgages are slightly more likely to default than in early 2005.

"Rising inflation expectations and decelerating rates of house price decline have helped spur lower default rates," the report stated.

The university said the index reached its highest level in 2007: 362.

But recent borrowers are still 43 percent more likely to default than borrowers who closed their loans in the 1990s.

"If the Fed is successful in raising the inflation rate with a new round of quantitative easing, nominal house prices will not have to fall as far to restore equilibrium, and defaults will be mitigated," said Dennis Capozza, professor of finance and real estate and the Dykema Professor of Business Administration
. "Furthermore, we are seeing a deceleration in the decline in house prices, although this may be a temporary result due to the expiration of the federal government home-purchase subsidy program. Initial evidence is already suggesting that the surge in buying at the expiration is being reversed out."

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