Metro Detroit and Michigan are coming closer to alignment with the nation for the average default risk on home loans, according to new data from Ann Arbor-based University Financial Associates LLC.
The economic analysis firm and lender consultant reports that metro Detroit has a default risk index of 194 for new loans originated in the fourth quarter, compared with 206 for loans in the previous quarter.
That’s compared with a Michigan risk index of 153 in the current quarter and 162 in the third quarter. For the nation as a whole, the risk index on newly originated prime and nonprime mortgages was 143 during the current quarter and 149 last quarter.
This means U.S. homeowners who obtain mortgages today are 43 percent more likely to default on their loans than the base value or average risk of loans originated over the decade in the 1990s.
Risk is still much lower than in the peak period of 2007 and early 2008.
“For Detroit, part of it is that economic conditions are improving and you’re not staring at the bankruptcies of (General Motors Co. and Chrysler Group LLC) like early last year. And the risk of job loss is generally lower,” said Dennis Capozza, founding principal of UFA and the Dale Dykema Professor of Business Administration at the University of Michigan Stephen M. Ross School of Business.
“Part of it is also that home prices have already dropped so far in the market. There’s a certain improvement in risk (of mortgages as a function of household) income.”
The UFA Default Risk Index measures risk on newly originated mortgages with a “constant-quality” loan model, weighing the same caliber of borrower, loan and collateral against local and national economic changes such as unemployment and changing interest rates.
Mortgage default risk in the Detroit market peaked around 590 in the first half of 2008, Capozza said, compared with a peak of 362 for the nation in 2007. The current index returns the nation as a whole to about the same mortgage risk level as the pre-peak market in early 2005.
Real estate markets in Nevada peaked around 1,100, Florida saw risk peak above 900 and California reached a risk plateau of 760 before the collapse of the real estate bubble sent home values falling more than 50 percent in some of those markets.