Refi Activity, Compliance Keeps Loan Defect Rate Low

First American Financial Corp., Santa Ana, Calif., said a combination of strong refinancing activity, low mortgage rates and compliant loan production processes are producing lowest level of loan defects and misrepresentation in recent history.

The company’s July Loan Application Defect Index fell by 2.8 percent in July to 70 from June and decreased by 16.7 percent from a year ago. The Defect Index fell by 31.4 percent from its high point of risk in October 2013.

The Defect Index for refinance transactions declined by 1.7 percent month-over-month and by 18.1 percent from a year ago. The Defect Index for purchase transactions declined by 1.3 percent month-over-month and by 13.2 percent from 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.

“The benefits in compliant loan production processes are becoming more clearly evident, particularly for refinance transactions, in the big declines we are observing in loan application and mortgage defect risk,” said First American Chief Economist Mark Fleming. “Refinance activity, fueled by historically low mortgage rates, combined with improved loan manufacturing processes are resulting in higher quality loan applications with the lowest level of defects and misrepresentation that we have seen in recent history.”

Other report highlights:
–States with the highest year-over-year increase in defect frequency are Maine (+16.7 percent), North Dakota (+11.9 percent), Missouri (+5.6 percent) and Montana (+2.6 percent).
–States with the highest year-over-year decrease in defect frequency are Michigan (-33.0 percent), Florida (-24.5 percent), New Mexico (-21.0 percent), Connecticut (-20.9 percent) and New Hampshire (-20.3 percent).
–Among the largest 50 metro areas, the only market with a year-over-year increase in defect frequency is St. Louis (+4.1 percent).
–Markets with the highest year-over-year decrease in defect frequency are Detroit (-37.0 percent); Louisville/Jefferson, Ky. (-27.4 percent); Buffalo, N.Y. (-26.6 percent); Orlando, Fla. (-25.8 percent); and Jacksonville, Fla. (-25.3 percent).

The report said South Carolina is currently the second-highest risk state in the nation and hosts three of the top five riskiest markets–Columbia, Charleston and Greenville. “The emergence of risk in these markets has been swift,” Fleming said. “For example, Columbia tracked consistently with the national average for loan application defect and misrepresentation risk until late 2015, but over the course of this year has reversed course. Defect risk in Columbia has increased 14.5 percent in the last 12 months.”

Fleming added South Carolina, like much of the South, is benefiting from increased demand for real estate of all types, as people are attracted by the relatively low cost of housing compared to markets in the West or Northeast. Low interest rates and income growth in South Carolina has caused real, consumer buying-power adjusted, house prices to decline 1.1 percent in July, as compared to a year ago.

“More affordable house prices continue to support growing demand,” Fleming said. “The charms of southern living may be elevating loan application defect and misrepresentation risk. In particular, as we saw in the housing boom, misrepresentation risk tends to rise in hot markets. As South Carolina, and the South more broadly, experiences a housing boom driven by strong affordability, misrepresentation risk is on the rise and contributing to the emergence of the state as a hot spot. It’s not just the summer heat that’s making South Carolina a hot market.”