First American: Automated Verification Tools Drive Risk Improvements
First American Financial Corp., Santa Ana, Calif., said the recent Day 1 Certainty initiative from Fannie Mae and incorporation of similar automated verification tools by Freddie Mac will have a “significant positive impact” on mortgage loan application defect and misrepresentation risk this year.
The company’s Loan Application Defect Index for November noted frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained unchanged in November from October but decreased by 12.8 percent from a year ago. The Index is down by 33.3 percent from its high point in October 2013.
First American reported the Defect Index for refinance transactions decreased by 3.4 percent month-over-month and was 16.4 percent lower than a year ago; the Index for purchase transactions was unchanged compared to last month and fell by 5.9 percent compared to a year ago.
The gap in defect, misrepresentation and fraud risk between adjustable-rate mortgages and fixed-rate mortgages narrowed in the past year, the Index said, as ARM risk declined 11 percent year-over-year, while fixed-rate mortgage risk declined at a slower rate of 7.7 percent year-over-year.
“The long and consistent downward trend in loan application defect and misrepresentation risk paused this month, after falling in seven of the last eight months. Yet, I expect the risk trend to continue its downward trajectory in 2017,” said First American Chief Economist Mark Fleming. “The Day 1 Certainty initiative at Fannie Mae and incorporation of similar automated verification tools at Freddie Mac are likely to have a significant positive impact on mortgage loan application defect and misrepresentation risk in the next year.”
Fleming noted 2017 is expected to be a transition year for loan application defect, misrepresentation and fraud risk. “Rising rates in the market will drive a transition to more purchases relative to refinances and more adjustable-rate mortgages relative to fixed-rate loans,” he said. “All other factors being equal, both of these trends point to increased defect, misrepresentation and fraud risk.”
The report said states with the highest year-over-year increase in defect frequency were Maine (+35.4 percent), South Dakota (+18.0 percent), Montana (+17.4 percent), Vermont (+13.9 percent) and Wyoming (+12.9 percent). States with the highest year-over-year decrease in defect frequency were Michigan (-20.5 percent), California (-19.7 percent), Oklahoma (-17.2 percent), New Mexico (-17.1 percent) and Florida (-17.0 percent).
Among the largest 50 metro areas, the only market with a year-over-year increase in defect frequency was St. Louis (+4.2 percent). Markets with the highest year-over-year decrease in defect frequency were Louisville/Jefferson, Ky. (-29.3 percent); Detroit (-26.0 percent); Oklahoma City (-25.8 percent); Sacramento, Calif. (-25.3 percent); and Miami (-23.3 percent).
