First American: FHA Loans Showing Lower Defect Risk
First American Financial Corp., Santa Ana, Calif., said its Loan Defect Index remained unchanged in August–and gave FHA loans some of the credit.
The Index decreased by 14.6 percent from a year ago and by 31.4 percent from the high point of risk in October 2013.
Purchase loan demand increased 9.2 percent in the second quarter compared to a year ago. The Defect Index for refinance transactions is unchanged compared to July and is 18.1 percent lower than a year ago. The Defect Index for purchase transactions is flat month-over-month, and is down 10.2 percent compared to a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions continues to decline much more than defect risk for purchase transactions, declining 41.0 percent as compared to 24.0 percent for purchase transactions.
First American Chief Economist Mark Fleming said as of late, FHA loans have been contributing to a lower defect risk noting that loan application and defect risk on transactions involving FHA/VA/USDA loans has declined more in recent years than the defect risk for conventional mortgages.
“While FHA loans are generally considered to have higher credit risk than conventional loans, according to the Defect Index, conventional loan risk is down 14.6 percent over a year ago, compared with a year-over-year decline of 17.7 percent for transactions involving FHA/VA/USDA loans,” Fleming said. “In addition, transactions involving FHA/VA/USDA loans are currently 14.5 percent less risky than transactions involving conventional loans.”
The report cited Atlanta and Charlotte, N.C., where the defect risk fell sharply partially due to FHA loan demand. It said in Atlanta, year-over-year growth rate for purchase loans accelerated by nearly 20 percent over the past year; over the same period, year-over-year growth rate for FHA purchase loans accelerated by 25 percent.
“Atlanta is one of the country’s fastest growing markets, where purchase demand is facilitated by the availability of credit made possible with FHA loans,” Fleming said. “As a result, our loan application defect and fraud risk index for Atlanta has shown significant improvement as well. In particular, loan application and defect risk in Atlanta is down over 12 percent in August compared to a year ago and is down an amazing 70 percent compared to the peak level of defect risk in November 2011.”
Charlotte, Fleming said, is another southern city experiencing a renaissance and purchase loan demand boom. The report showed year-over-year growth rate for purchase loans in Charlotte accelerated 16 percent from a year ago, while the year-over-year growth rate for FHA purchase loans accelerated 25 percent. The loan application defect and fraud risk index fell by more than 15 percent in August compared to a year ago and is down 28.3 percent compared to the peak level of defect risk in September 2013.
Other report highlights:
–States with the highest year-over-year increase in defect frequency were Maine (+19.2 percent), North Dakota (+13.6 percent), Missouri (+8.7 percent), Montana (+5.3 percent) and Vermont (+5.1 percent).
–States with the highest year-over-year decrease in defect frequency were Michigan (-29.4 percent), Florida (-23.8 percent), Arizona (-19.3 percent), Oklahoma (-19.1 percent), and New Mexico (-19.0 percent).
–Among the largest 50 Core Based Statistical Areas, the only market with a year-over-year increase in defect frequency is: St. Louis (+2.7 percent).
–Markets with the highest year-over-year decrease in defect frequency were Detroit (-33.9 percent); Oklahoma City (-27.8 percent); Louisville/Jefferson, Ky. (-27.1 percent); Orlando, Fla. (-25.8 percent); and Jacksonville, Fla. (-24.7 percent).
