First American: Fraud Risk Continues to Drop
Today’s housing market benefits from new technology and policy guardrails against fraud and defect risk, innovations that will serve the industry well in the uncertain days ahead, said Mark Fleming, Chief Economist with First American Financial Corp. Santa Ana, Calif.
The company’s monthly Loan Application Defect Index for February reported frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 4.6 percent from January to a record low. From a year ago, the Defect Index decreased by 34.7 percent and is down by 39.2 percent from the high point of risk in October 2013.
The report said the Defect Index for refinance transactions decreased by 5.5 percent compared to January and by 39.5 percent from a year ago. The Defect Index for purchase transactions decreased by 2.6 percent from January and by 23.2 percent from a year ago.
Fleming said the report shows a long-run downward trend since First American began tracking defect risk in 2011, with a few exceptions. In February 2020, this long-run trend continued as overall defect risk reached its lowest level in index history,” he said.
Fleming noted while various dynamics drive fraud risk in the short run, two forces have consistently reduced fraud risk over the past 10 years: policy and technology innovation.
“Advancements in mortgage technology allow lenders to compare a borrower’s information against employment databases and other data sources, and algorithms can inspect whether recent bank account deposits are consistent with a borrower’s paystubs,” Fleming said. “Technology can also be used to flag missing or inconsistent data. These advancements, which help to deliver a convenient, digital, highly automated and all-around better home-buying experience, have also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk.
The report said no states posted a year-over-year increase in defect frequency. States with the greatest year-over-year decrease in defect frequency were West Virginia (-51.0 percent), North Carolina (-42.9 percent), Indiana (-42.3 percent), Montana (-42.2 percent), and Virginia (-42.2 percent).
Among top metros, no market showed a year-over-year increase in defect frequency. Markets with the greatest year-over-year decrease in defect frequency were Richmond, Va. (-44.3 percent), Detroit (-43.3 percent), Virginia Beach, Va. (-43.0 percent), San Diego (-41.2 percent), and Indianapolis (-41.1 percent).