Overall default risk is up, according to the recent Default Risk Index released by Universal Financial Associates (UFA) on Tuesday. The Index is up 25 points over fall 2016’s numbers.
UFA’s Index, which measures the risk of default on newly originated prime and nonprime mortgage loans, calls Q1 and Q1 2017 “jumpy.”
“Expected losses on newly originated mortgages jumped last quarter and stayed high,” UFA reported. “The UFA Default Risk Indices for the first and second quarters of 2017 have jumped 25 points compared with fourth quarter 2016.”
According to UFA, the rising Index means that “under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 6 percent higher than the average of loans originated in the 1990s, due solely to the local and national economic environment.”
The impetus behind the rising risk of default? UFA reports that it’s two-fold: increasing mortgage rates and tightening monetary conditions. Given this, UFA says we can expect default risk to rise even more in the coming months.
“With the Federal Reserve presaging further increases in interest rates, we should expect default risks to rise further in the near future,” UFA reported. “Higher interest rates increase the payment burden for homeowners and reduce home affordability, which makes mortgage defaults more likely.”
UFA releases its Default Risk Index four times per year in order to reflect changing economic and fiscal conditions.
“Each quarter UFA evaluates economic conditions in the United States and assesses how these conditions will impact expected future defaults, prepayments, loss recoveries, and loan values for nonprime loans,” UFA reported. “A number of factors affect the expected defaults on a constant-quality loan. Most important are worsening economic conditions. A recession causes an erosion of both borrower and collateral performance. Borrowers are more likely to be subjected to a financial shock such as unemployment, and if shocked, will be less able to withstand the shock. Fed easing of interest rates has the opposite effect.”
To view the full Index, visit UFA.net/Research.