UFANET – Research | Heat Map of Defaults by Zip Code

UFA's Default Risk Index by Zip Code - National Heat Map 1991-2016

Spring 2016

The UFA Default Risk Index now shows defaults by zip code as a heat map. This movie presents new research from UFA in a new format.

“Our heat map shows the severity of the bubble period for residential mortgage defaults,” says Dennis Capozza, who is Professor Emeritus of Finance at the Ross School of Business at the University of Michigan and a founding principal of UFA. “It also shows the extent of the recovery. Default risks on new originations are now rising again as the recovery matures and housing prices escalate.”

The UFA Default Risk Index measures the risk of default on newly originated nonprime mortgages. UFA’s analysis is based on a constant-quality loan, that is, a loan with the same borrower, loan and collateral characteristics. The index reflects only the changes in current and expected future economic conditions, which are now less favorable than in recent years.

Each quarter UFA evaluates economic conditions in the United States and assesses how these conditions will impact expected future defaults, prepayments, loss recoveries and loan values for nonprime loans. A number of factors affect the expected defaults on a constant-quality loan. Most important are worsening economic conditions. A recession causes an erosion of both borrower and collateral performance. Borrowers are more likely to be subjected to a financial shock such as unemployment, and if shocked, will be less able to withstand the shock. Fed easing of interest rates has the opposite effect.

UFA’s pioneering mortgage analysis has successfully predicted such developments as the increased defaults in Southern California in the mid-90s. Its predictions are based on an extensive analysis of local economic conditions in each state and the relationship of those conditions to loan performance. The historical record of millions of mortgage loans is studied each quarter to assess the vulnerability of each state to loan losses and prepayments. The detailed analysis of each state – including best and worst places to lend – is available in the UFA Mortgage Report, published on a quarterly basis.