Investors and lenders should expect loans currently originated to have a 20 percent higher chance of default than those originated in the â€™90s due to current economic conditions, according to the University Financial Associates (UFA).
The UFA Default Risk Index rose slightly to 120 in the second quarter of 2012 from 119 in the previous quarter. While loans currently originated are more likely to default than those from the â€˜90s, loans originated today are still much less likely to default compared to vintages from 2006 to 2008.
â€œThe worst is clearly over so that mortgage lenders can comfortably loosen credit for newly originated loans,â€ said Dennis Capozza, business professor at the University of Michigan and a founding principal of UFA. â€œImportant factors in the more favorable outlook include low mortgage rates, the Federal Reserveâ€™s loose monetary policy, and lower house prices now at or below fundamental values in many locations.â€
The Index measures the risk of default on recently originated prime and nonprime mortgages. The analysis is based on a â€œconstant-qualityâ€ loan, meaning, a loan with the same borrower, loan, and collateral characteristics. The Index reflects only the changes in current and expected future economic conditions.
Every quarter, UFA examines the economic state of the U.S. and determines how certain conditions will affect future default, prepayments, loss recoveries, and loan values for prime and nonprime loans.
UFA was founded in 1990 by two finance professors of finance to bring state-of-the-art analytical techniques to lenders.
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