Mortgage Fraud Risk Falls to New Low
First American Financial Corp., Santa Ana, Calif., said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 3.0 percent from December to the lowest level since the company began tracking such data in 2011.
First American said from a year ago, its monthly Loan Application Defect Index decreased by 28.6 percent and is down 36.3 percent from the high point of risk in October 2013.
The Defect Index for refinance transactions decreased by 5.2 percent from December and decreased by 33.7 percent from a year ago. The Defect Index for purchase transactions remained the same compared to December but is down by 17.9 percent from year ago.
“Overall defect risk, as measured by our Loan Application Defect Index, has largely trended down since early 2019 with a few exceptions,” said Mark Fleming, chief economist with First American. “We can thank the increasing share of less risky refinance transactions for the low levels of defect and fraud risk.”
Fleming noted as mortgage rates fall, the incentive to refinance increases. “For many homeowners, the most important consideration of whether to refinance or not is if the mortgage rate is sufficiently lower than their existing rate,” he said. “In January, with the 30-year, fixed-rate mortgage at its lowest level since November 2016, refinance applications were 146 percent higher than the same week one year ago. Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the reduced risk of misrepresentation and fraud is due to the growing share of lower risk refinance transactions within the mortgage market.
Fleming also observed this trend has surfaced in previous refinance booms and mini-booms.” In 2012, overall fraud risk declined 4.7 percent, as the mortgage rate declined from 3.9 percent to 3.6 percent between the first quarter of 2012 and fourth quarter of 2012 and the share of refinances increased from 68 percent to 72 percent,” he said. “Similarly, fraud risk reached a low point in November 2016 amid the refinance boom between the fourth quarter of 2015 and third quarter of 2016, which pushed the share of refinance originations from 46 percent to 51 percent.”
More recently, between July and August 2019, overall fraud risk fell 4.0 percent month-over-month, as the mortgage rate declined from 3.8 percent to 3.6 percent, triggering a 196-percent jump in refinance volume compared with the same week one year ago. “When refinance transactions boom, fraud risk falls,” Fleming said. “If the mortgage market composition continues to shift toward refinance transactions in 2020, the risk of defect, fraud and misrepresentation will continue to decline.”
First American reported no states with a year-over-year increase in defect frequency. States with the greatest year-over-year decrease in defect frequency were West Virginia (-47.5 percent), Indiana (-38.3 percent), North Carolina (-37.4 percent), Virginia (-37.1 percent) and Montana (-36.4).
Among largest metros, no market with a year-over-year increase in defect frequency. Markets with the greatest year-over-year decrease in defect frequency were Richmond, Va. (-40.7 percent), Virginia Beach, Va. (-39.4 percent), Indianapolis (-36.7 percent), Raleigh, N.C. (-36.5 percent) and Detroit (-35.8 percent).