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Default Risk Retreats

7 years since conditions this good

March 19, 2012

By staff

It's been several years since the risk of default on home loans has been as low as it is now. In addition, conditions are ripe for further improvement.

Residential mortgages originated during the first quarter of this year have the same risk of defaulting as loans that were made in 2005.

Compared to mortgages funded in 2007, the risk level has plummeted 65 percent.

The performance data was delivered Monday from the University of Michigan's Ross School of Business and based on the University Financial Associates Default Risk Index.

The index measures the risk of default on newly originated prime and nonprime mortgages. The same borrower credit characteristics are used in each period, while changes in current and expected future economic conditions are reflected.

In the first quarter, the index was 128. It peaked during 2007 at 362.

Still, borrowers from the first-quarter vintage are 28 percent more likely to default than on loans originated during the 1990s.

"Our baseline macro scenario is based on consensus expectations and has real GDP growing at 2.5 percent for the next two
years and core inflation at 1.6 percent," University of Michigan Professor Dennis Capozza said in the report. "We believe that surprises are more likely to be on the upside than the downside of this consensus."

Capozza created the index and founded University Financial Associates, a risk-management firm that forecasts mortgage and consumer loan performance.

He added,
"Upside surprises for the macro scenario would reduce defaults relative to this baseline. Currently, record low mortgage rates and accommodative monetary policy are helping to support the housing market and reduce defaults relative to what would otherwise prevail."

Lender Processing Services Inc. reported that 30-day residential delinquency, including foreclosures, fell for the second consecutive month in January to 12.12 percent.

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