Foreclosure Starts Will Subside in 2010: UFA

After rising over 30 percent a year for the last four years, foreclosure starts will finally begin to decline next year, according to University Financial Associates LLC (UFA), a risk management firm that forecasts mortgage and consumer loan performance by zip code.

The latest research by the Ann Arbor, Michigan-based company indicates that national and local economic conditions – including a reviving economy, slowing house price depreciation, and tighter underwriting of recent loans — will lead to a decline in foreclosures in 2010.

According to Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA, the anticipated improvement in foreclosures started will bring much-needed relief to the severely battered mortgage and housing markets.

But like many other housing experts and analysts, Capozza cautions that for the time being, steep increases in unemployment are continuing to mitigate the positive factors. Tempering his encouraging outlook, Capozza says when coupled with the large numbers of homeowners who are underwater, this means that housing markets will continue to take a beating for some time, despite federal stimulus incentives.

A number of factors affect expected default rates on constant-quality loans, UFA said. The most important being local economic conditions. A recession causes an erosion of both borrower and collateral performance, the firm explained. And in an economic downturn like the present, borrowers are more likely to be subjected to a financial shock such as unemployment, and if shocked, will be less able to withstand the impact, UFA said.

The forecast of foreclosure rates is part of UFA’s ongoing research, which the company points out successfully predicted such developments as the increased defaults in Southern California in the mid-90s, and the recent increases in mortgage foreclosures nationwide.

 

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