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Understanding Default Risk

Default risk rose slightly in Q1 2019, according to the latest University Financial Associates (UFA) Default Risk Index, a measure of the risk of default on newly originated prime and nonprime mortgages. UFA notes that under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 14% higher than the average of similar loans originated in the 1990s, due solely to the local and national economic environment.

“Although lower mortgage rates are providing a boost to the housing market, on balance monetary policy metrics and our housing forecasts are weaker this quarter,” said Dennis Capozza, Professor Emeritus of Finance at the University of Michigan and founding member of UFA. “In most regions the UFA forecasts see real price declines within two years. As a result the UFA Default Risk Index continues to creep higher.”

Black Knight data recently reported that mortgage delinquencies dropped to 3.47% as of April, the lowest point on record, and Black Knight noted that the 5.51% month-over-month decline between April and March was the strongest single-month April improvement Black Knight has seen.

Serious delinquencies fell to a 12-year record low as well, down to 474,000, marking a 124,000 year-over-year decline. Despite the declines, foreclosure starts edged up in April month-over-month by 4.28%, putting the total at 41,400. Year-over-year, however, foreclosure starts declined by 16.02%.

CoreLogic recently reported similar trends in delinquency. According to CoreLogic’s latest Loan Performance Insights report, the amount of mortgages that were delinquent more than 30 days decreased slightly year-over-year to 4%.

The report states the nation’s overall delinquency rate has fallen on a year-over-year basis for the past 14 consecutive months. CoreLogic stated that the decreases were attributable to the strength of loan vintages in the years since the residential lending market recovered following the housing crisis.

Eleven core-based statistical areas/metros experienced increases in serious delinquency rates, most of them located on the East Coast, according to CoreLogic's report.

"We are on track to test generational lows as delinquency rates hit their lowest point in almost two decades. Given the economic outlook, we are likely to see more declines over the balance of this year. Reflective of the drop in delinquency rates, no state experienced a year-over-year increase in its foreclosure inventory rate so far in 2019,” said Frank Martell, CoreLogic's President and CEO.

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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