Subprime Forecast: Defaults Will Edge Up On Today's Loans.(Brief Article)(Statistical Data Included)

The weak economy is causing the risk of default on newly originated, nonprime credit quality mortgages to rise again, according to University Financial Associates here.

UFA, which tracks the credit risk on new subprime mortgages on a quarterly basis, said that its index of default risk rose to 105 in the spring of 2002, up from a reading of 99 six months ago. A reading of 100 would reflect the average performance expectations for a loan originated in the 1990s.

Lenders should expect defaults on nonprime loans currently being originated to be 20% higher than the average of loans originated in 1998 and 1999, according to UFA. Defaults will be 5% higher than the average default rate on mortgages originated throughout the 1990s, according to the report.

The analysis is based on a "constant quality" loan, so that the index is designed to take into account changes that market conditions would have on the same borrower with the same loan and collateral characteristics over time.

Economic conditions for the performance of subprime loans have been less favorable over the last two years than the prior two-year period, according to UFA.

"The risk is rising because the accommodating interest rate policy of the Fed is not sufficient to offset the eroding prospects for both the consumer and the underlying housing collateral," said Dennis Capozza, professor of finance at the University of Michigan and a principal in UFA.

However, the risk remains well ...