Foreclosures Seen Declining in 2010

After reaching an all-time high in 2009, foreclosure starts will to decline after the first of the new year, according to a new forecast from UFA LLC, an Ann Arbor, Michigan risk management firm that forecasts mortgage and consumer loan performance by zip code.

UFA's research indicates that national and local economic conditions -- a reviving economy, slowing house price depreciation, and tighter underwriting of recent loan vintages -- will cause foreclosures to decline. For the fourth quarter, however, steep increases in unemployment are continuing to mitigate the positive factors, which mean that housing markets will continue to take a beating for some time, despite federal stimulus incentives.

"The improvement in foreclosures started will provide relief to the severely battered mortgage and housing markets," indicated Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA. "A combination of factors including a slowing of house price depreciation, a reviving economy, tighter underwriting of recent loan vintages, and burnout of the worst vintages from 3-5 years ago will make the improvement possible."

"Working against the welcome decline in foreclosures is the steep increase in unemployment, which will interact with the large numbers of homeowners who are underwater to prevent even greater declines in foreclosures that could have been expected without high unemployment," said Capozza.

Each quarter UFA analyzes representative mortgage loans in the serviced portfolio of all mortgages outstanding and estimates the probability of default and prepayment at each month in the future life of each loan. Inputs to the assessment include underwriting variables like loan-to-value ratios and credit scores as well as UFA's own zip code level economic scores, ForeScore™ Zip. UFA aggregates the zip code level analysis to obtain the national forecast. Improvements in the local economic scores are the most important driver of the forecast decline of foreclosures started.

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