Fraud risk on purchase mortgages climbs for the first time since March

For the first time since March, First American’s Loan Application Defect Index indicates the nation’s mortgage defect risk increased, but only for purchase mortgages.
According to the company, the Defect Index for purchase transactions increased by 2.7% in November compared with October, while the Defect Index for refinance transactions fell by 1.6%.
Although it should be noted, that both purchase and refinance defect risk are down from last year.
Mark Fleming, First American’s chief economist, said overall defect risk has been declining since March of this year, and November marks a pause to this trend.
“After falling since March, the Defect Index for purchase transactions increased 2.7% compared with October, while the Defect Index for refinance transactions fell by 1.6%, its eighth straight month of declining risk,” Fleming said. “The overall Defect Index, which includes both purchase and refinance transactions, remained the same compared with last month, and is 16% lower than one year ago.”
So, what sparked the recent increase in purchase fraud risk? Fleming said it has a lot to do with the nation’s house-buying power, which declined in October when mortgage rates began to tick back up.
“In 2019, the average monthly growth rate of house-buying power through September was 1.6%. Over the two months of October and November combined, house-buying power declined 0.6% relative to September,” Fleming said. “The slowdown in house-buying power appreciation lessens the confidence of home buyers, so they may be more inclined to misrepresent information on a loan application, leading to an increase in the Defect Index for purchase transactions.”
Heading into 2020, Fleming said the direction of defect risk is in large part dependent on mortgage rates and how many homeowners that are ‘in the money’ choose to refinance.
“Slightly higher mortgage rates through the end of the year may result in a small dip in house-buying power and a further pullback in refinance demand. But, looking ahead to 2020, mortgage rates are expected to remain below 4%,” Fleming said. “At that level, there are still 6.8 million borrowers today who could benefit financially by refinancing to a lower mortgage rate.”

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