Are first-time buyers overextending themselves?

by Donald Horne02 Oct 2015
“You see things in the mortgage industry happening again that were clear warning shots, ignored in 2006 and 2007,” says Kellen Jones, chief operating officer of Cache Private Capital. “Sometimes these programs and underwriting parameters impact the defect index adversely; but more often these influences are much more dramatic than any index can forecast.”

Commenting on the First American Loan Application Defect Index, Jones has an uneasy feeling that buyers’ eyes are once again getting too big for their stomachs, with mortgages being too large for their debt ratios.

“When first time home buyers over-extend themselves or there is very little skin in the game for high-risk borrowers,” Jones told MPA, “the adverse effect comes on more like an avalanche.” 

Numbers from July’s index had defects rising 4.9% from June to July – and while defects were down 5.6% from the same time last year, the frequency of overall application defects is on the rise for 2015.

The defect index estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard system. The index is based on the frequency with which defect indicators are identified.

The Defect Index moves higher as greater numbers of defect indicators are identified. An increase in the index indicates a rising level of loan application defects. The index, nationally and in all markets, is benchmarked to a value of 100 in January 2011. Therefore, all index values can be interpreted as the percentage change in defect frequency relative to the defect frequency identified nationally in January 2011

States with the highest month-over-month increase in defect frequency are Oklahoma (up 14%), Hawaii (up 13.1%), Louisiana (up 10%), Texas (up 10%) and Colorado (up 9.3%). Those states with the highest rate of defects are Michigan, Florida, Texas, Oklahoma and Hawaii.

While Jones can’t put his figure on why certain regions see a bigger margin on the index than others, he does have a few theories.

“One of them is that underwriters and banks feel a pressure to be active to a certain extent while at the same time, trends suggest we're closer to the end of a cycle than the beginning,” he says. “You see regional impacts, in my opinion, because Americans and Canadians – homebuyers – are consumers by nature. And as healthy as the market has been, people see new homes and want more.”