Why A Greater Defect Risk for Purchases, Southern Buys

Fleming: “The demographic influence of Millennial first-time homebuyers will be an important driver of the defect index as the share of loan products targeted to first-time buyers increases and their preference for conventional or FHA loans differs from other types of borrowers.”

IRVINE, CA—According to First American Financial Corp.’s Loan Application Defect Index for October, the overall defect index for residential loan applications decreased month-to-month and year-over-year. Yet, there is a concentration of defect risk in the South and a greater defect risk being shown for purchase-driven versus refinance-driven loans, the firm’s chief economist Mark Fleming points out.

In the report, Fleming says, “The post-election sudden increase in mortgage rates has accelerated the shift away from a refinance-driven market toward a purchase-dominated market. Based on analysis of loan application defect risk trends, purchase loans are riskier, so I expect that the overall decline in loan application and defect risk will slow as rates continue to rise into 2017 and the share of higher risk purchase loans increases.”