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Updated 7:00 AM December 7, 2009

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Home foreclosures expected to decline nationwide next year

As the Obama administration announced new measures last week to help troubled home borrowers, there is more good news for homeowners — foreclosures will begin to fall next year, a U-M researcher says.

After rising more than 30 percent a year for the last four years, foreclosures across the country will drop from a peak of about 2.75 million this year to about 1.75 million in each of the next two years, before declining further to less than 1.5 million by early 2012, predicts Dennis Capozza, professor of finance and real estate at the Stephen M. Ross School of Business.

According to Capozza, improving national and local economic conditions — a reviving economy, slowing house-price depreciation and tighter underwriting of recent loan vintages — will help stem the tide of foreclosures.

"The improvement in foreclosures will provide relief to the severely battered mortgage and housing markets," Capozza says. "For the time being, however, steep increases in unemployment are continuing to mitigate the positive factors, which means that housing markets will continue to take a beating for some time, despite federal stimulus incentives."

Each quarter, Capozza and colleagues at University Financial Associates — a risk-management firm that forecasts mortgage and consumer loan performance — analyze representative mortgage loans in the serviced portfolio of all mortgages outstanding and estimate the probability of default and prepayment for each ZIP code in the United States.

In related research, Capozza says the surge in foreclosures in the past four years has been caused equally by economic conditions and underwriting quality.

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