The risk of defects in mortgage applications decreased 1.4% in October compared with September and was down 13.9% compared with October 2015, according to First American Financial Corp.’s Loan Application Defect Index.
What’s more, the level of risk is down 33.3% compared with the high point of risk in October 2013, the report shows.
Part of the reason for the increase is the shift away from refinances – which, in general, carry fewer defects – toward purchases. This is due, in part, to rising mortgage interest rates.
“The post-election sudden increase in mortgage rates has accelerated the shift away from a refinance-driven market toward a purchase-dominated market,” explains Mark Fleming, chief economist at First American, in a statement. “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.”
The risk of defects in refinance applications decreased 1.7% in October compared with September and was 15.9% lower compared with October 2015.
The risk of defects in applications for purchases was unchanged compared to September but was down 5.9% compared with October 2015.
Regionally, the risk of defects in applications was strongest in the South in October.
“Defect, fraud and misrepresentation risk can vary substantially by location,” Fleming explains. “In fact, the most recent data is showing a growing division between the North and South. Cotton states in the South are showing the highest levels of risk, compared to the northern Rust Belt, where application and defect risk is currently the lowest. Defect risk is concentrating in the South, particularly in Arkansas and Louisiana, as well as in large markets in Texas and South Carolina.”