By Peter Ricci
Default risk for American homeowners fell to its lowest level in seven years in the first quarter of 2012, according to the latest Default Risk Index from University Financial Associates (UFA), with improving economic conditions being the key contributor
to the decline.
A research firm that evaluates the economic conditions of the U.S. with particular consideration for future defaults, prepayments, loss recoveries and loan values for nonprime loans, UFA has been measuring default rates since 1990, and Dennis Capozza, one of UFA’s founding principals, said he expects pleasant surprises going forward from the mortgage markets.
“We believe that surprises are more likely to be on the upside than the downside of this consensus,” Capozza said. “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.” UFA also reported real GDP growth and inflation, which it projected to be 2.5 percent and 1.6 percent through 2014, respectively, will be a benefit to the index.
From 1996 to 2003, the Default Risk Index never rose beyond 100, but starting in the last two quarters of 2004, it ballooned to 200 by mid-2006 and peaked at 225 in mid-2007. It has decreased steadily since then, and its current rate of 128 does, as mentioned earlier, bring it to pre-recessionary levels.
The index measures the risk of default on newly originated nonprime mortgages of “constant-quality,” meaning loans with the same borrower, loan and collateral characteristics through its lifespan. The index reflects only the changes in current and expected future economic conditions, which are less favorable now than in previous years.