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Risk of home loan default drops by half from 2007 peak.

Under current economic conditions, investors and lenders should expect defaults on mortgage loans currently being originated to be 84 percent higher than the average of loans originated in the 1990s--but much less than the worst years of the economic downturn between 2006 and 2008, according to the latest UFA Mortgage Report [TM] by University Financial Associates (UFA), Ann Arbor, Michigan, a risk-management firm that forecasts mortgage and consumer loan performance.

The UFA Default Risk Index for the third quarter of 2010 dropped to a score of 184--half the peak level set in 2007, explained Dennis Capozza, the Dale Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, Ann Arbor.

"While default risks remain elevated, mortgage originators need not be as apprehensive about new originations," said Capozza, who is also a founding principal of UFA.

The index represents a comparison with the average of the 1990s. Thus, the worst-case risk of default on home loans is 1.84 times or 84 percent higher than the average of the 1990s, said Capozza.

The UFA Default Risk Index is based on a "constant-quality" loan or a loan with the same borrower, loan and collateral characteristics. The index reflects only the changes in current and expected future economic conditions, which are much less favorable currently than in prior years, explained Capozza.

"The index is slowly returning to pre-crisis levels, but may need another five years to complete the trek," Capozza said. "A macroeconomic detour into deflation would lengthen the journey."

Charles Wisniowski is a contributing writer based in Frederick, Maryland. He can be reached at

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Title Annotation:Briefing Book
Comment:Risk of home loan default drops by half from 2007 peak.(Briefing Book)
Author:Wisniowski, Charles
Publication:Mortgage Banking
Article Type:Brief article
Geographic Code:1USA
Date:Oct 1, 2010
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