Rate Defects Up from Year Ago; Rising Rates Could Spell Further Increase
Loan application defects, fraud and misrepresentation increased by more than 20 percent in 2017, and that figure could rise in 2018 as mortgage interest rates rise, said First American Financial Corp., Santa Ana, Calif.
The company’s monthly Loan Application Defect Index reported its indicators for both refinance and purchase applications were unchanged in December from November. However, it reported the overall index increased by 20.3 percent in 2017 from 2016. The Defect Index for refinance transactions rose by 21.1 percent on a yearly basis, while the Defect Index for purchase transactions rose by 12.3 percent from a year ago.
Overall, the Defect Index is down 18.6 percent from the high point of risk in October 2013.
“Much of the elevated risk can be attributed to an increase in the share of purchase mortgage transactions, which tend to carry more risk,” said First American Chief Economist Mark Fleming. “It’s possible that all economists agree–a rarity–that mortgage rates will increase in 2018, which should increase the market share of purchase mortgage transactions, putting upward pressure on the overall risk of defect, fraud and misrepresentation.”
The Mortgage Bankers Association forecasts that the 30-year, fixed-rate mortgage rate to rise to nearly 5 percent by the end of 2018
“As the benefit of refinancing a mortgage declines for many consumers, the share of refinance loan transactions will likely decrease and the share of purchase transactions will increase,” Fleming said. “We have seen this before, in 2013, as mortgage rates rise, so does overall defect, fraud and misrepresentation risk.”
First American reported between January and September 2013 mortgage rates increased by 1.1 percent. Over that same time period, the overall level of risk in the Defect Index increased by 7.5 percent.
The report states with the greatest year-over-year increase in defect frequency were South Dakota (+46.7 percent), New Mexico (+38.1 percent), Idaho (+31.6 percent), North Dakota (+31.1 percent) and Nebraska (+29.3 percent). Only Connecticut (-1.5 percent) saw a year-over-year decrease in defect frequency.
Among largest metro areas, markets with the greatest year-over-year increase in defect frequency were Virginia Beach, Va. (+39.7 percent), Orlando, Fla. (+32.9 percent), Oklahoma City (+31.9 percent), Miami (+31.3 percent) and Las Vegas (+30.2 percent). Only Hartford, Conn. (-1.6 percent) saw a year-over-year decrease in defect frequency.
MBA releases its 4th Quarter National Delinquency Survey this Thursday, Feb. 8.
The NDS, conducted since 1953, covers 39 million loans on one- to four- unit residential properties. Loans surveyed are reported by more than 100 lenders, including mortgage bank, commercial banks and thrifts.
