First American: Low Rates Spark Decline in Loan Defects, Fraud Risk

First American Financial Corp., Santa Ana, Calif., said its Loan Application Defect Index decreased by 1.4 percent in June, in part because of low rates triggering a jump in less risky refinance applications.

The Index fell by 12.2 percent from a year ago and by 5.3 percent over the past three months, a trend that First American Chief Economist Mark Fleming said shows “no sign of abating.”

“We expect this trend to continue into July, as the impacts of ‘Brexit’ and global uncertainty keep rates low, triggering an increase in the volume of lower risk refinance loan applications,” Fleming said.

Fleming noted the Defect Index has been consistently trending lower, apart from the increases in risk in 2013 and early 2015, driven by the impact of improvements to the systems and production standards mitigating risk throughout the lending industry and the continued strength of refinance application activity due to low mortgage rates.

“Refinance applications are inherently less risky than purchase applications, so defect and fraud risk declines as refinance applications become a larger share of the overall mix of loan applications,” Fleming said.

The Defect Index for refinance transactions declined by 3.2 percent month-over-month and by 15.5 percent from a year ago. The Defect Index for purchase transactions declined by 1.2 percent month-over-month and by 11.1 percent from a year ago. The report said 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 40.0 percent as compared to 23.7 percent for purchase transactions.

The report said states with the highest year-over-year increase in defect frequency are were Maine (+14.0 percent), North Dakota (+13.6 percent), Missouri (+10.0 percent), Montana (+5.3 percent) and Alaska (+2.8 percent). States with the highest year-over-year decrease in defect frequency were Michigan (-31.4 percent), Florida (-21.8 percent), Delaware (-19.5 percent), Connecticut (-17.8 percent) and New York (-17.6 percent).

Among the largest 50 Core Based Statistical Areas, the only one market with year-over-year increase in defect frequency is: St. Louis (+9.9 percent). Markets with the highest year-over-year decrease in defect frequency were Detroit (-35.9 percent); Jacksonville, Fla. (-23.5 percent); Miami (-22.7 percent); Louisville/Jefferson, Ky. (-20.3 percent); and Orlando, Fla. (-20.2 percent).