Rising Rates and Falling Standards Raise Default Risk | South Salem Real Estate

Mortgages currently being originated stand a 14 percent higher risk of default due solely to current economic conditions, especially rising mortgage interest rates and falling underwriting standards.

Under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 14% higher than the average of similar loans originated in the 1990s, due solely to the local and national economic environment.

Investors and lenders should expect defaults to rise on new loans according to the latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Michigan. The UFA Default Risk Index for the third quarter of 2013 rose to 114 from last quarter’s revised 96 in our baseline scenario.

“Most of the increased risk this quarter can be attributed to the hefty increase in mortgage rates – 100bps in just three months! Borrowers initiating mortgages at these higher rates will have higher payment ratios and will be more likely to default if the household is stressed,” said Dennis Capozza, Professor of Business Administration in the Ross School of Business at the University of Michigan and a founding principal of UFA.

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