""University Financial Associates, LLC"":http://www.ufanet.com/Default0.asp (UFA), headquartered in Ann Arbor, Michigan, recently released its quarterly Default Risk Index, showing that although mortgage risks are still elevated, they are quickly returning to normal levels.
[IMAGE] [COLUMN_BREAK]For the first quarter of 2010 the index dropped to 158 from last quarter's 164, down more than half from its peak level of 330 set in 2007. UFA said the index illustrates the important role that local economic conditions have played in the credit cycle because its analysis is based on a ""constant-quality"" loan, which is a loan with the same borrower, loan, and collateral characteristics.
This quarter's index introduced a new model, incorporating both prime and nonprime loan data. Under current economic conditions, UFA said nonprime investors and lender should expect defaults on loans currently being originated to be 58 percent higher than the average of loans originated in the 1990s. If inflation rates spike, as some observers expect, nominal house prices will be higher and defaults will be lower.
""Although UFA forecasts that house prices will continue to decline, the rate of decline has decelerated. The hardest-hit areas have begun to return to sustainable levels,"" said Dennis Capozza, a founding principal of UFA. ""Slower house price depreciation will mitigate risk levels for mortgage lenders.""