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Mortgage Default Risk Edging Toward ‘Normalcy’

Lenders and investors should expect defaults on mortgage loans currently being originated to be 31 percent higher than the average of loans originated in the 1990s, according to a new report from ""University Financial Associates"":http://www.ufanet.com (UFA).

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The UFA Default Risk Index for the fourth quarter of 2011 edged lower to 131 from last quarter's revised 133. The index's baseline of 100 correlates to the default risk of loans made during the 1990s.

As a point of comparison, UFA's index reading measuring the risk associated with mortgage default was 141 as recently as the first quarter of this year. For what UFA says were the worst vintages of this cycle (2006-2008), the default index soared above 225.

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UFA says its Default Risk Index finds that residential mortgage default and prepayment risks are continuing their return to normalcy.

""Despite continuing high unemployment and the threat of contagion from Europe, our Default Risk Index has improved,"" said Dennis Capozza, who is the Dale Dykema professor of business administration in the Ross School of Business at the University of Michigan, and a founding principal of Ann Arbor, Michigan-based UFA.

""With consumer balance sheets improving and mortgage rates at record lows, the stage is set for a recovery in the housing market, for which lenders and investors may do well to prepare. We await the catalyst,"" Capozza said.

The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA's analysis is based on a ""constant-quality"" loan, that is, a loan with the same borrower, loan, and collateral characteristics.

Each quarter, UFA evaluates economic conditions in the United States and assesses how these conditions will impact future mortgage defaults, prepayments, loss recoveries, and loan values.

The index reflects only the changes in current and expected future economic conditions, which the company says ""are much less favorable currently than in prior years."" UFA's current assessment has GDP growing just above trend for the next two years and at trend thereafter, but does not envision another recession.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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