First American: Defect Index Continues Downward Trend, Thanks to Refinancings
The refinance mini-boom has been good news for lenders; it’s also been good news in deterring mortgage defects and fraud, according to First American Financial Corp., Santa Ana, Calif.
The company’s monthly Loan Application Defect Index said as mortgage market composition continues to shift toward refinance transactions in 2019, the risk of defect, fraud and misrepresentation continues to decline. The Index reported frequency of defects, fraudulence and misrepresentation in information submitted in mortgage loan applications decreased by 5.0 percent in July compared to June. From a year ago, the Defect Index was unchanged.
The Defect Index for refinance transactions decreased by 4.2 percent from June and was unchanged from a year ago. The Defect Index for purchase transactions decreased by 3.6 percent from June but rose by 1.3 percent from a year ago.
The report said the Defect Index is now 25.5 percent below it high point of risk in October 2013.
“The 30-year, fixed mortgage rate has been declining since December 2018, and in July 2019 reached 3.8 percent, the lowest rate since November 2016,” said First American Chief Economist Mark Fleming. “Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, so the reduced risk of fraud and misrepresentation in July is largely due to the increasing share of lower-risk refinance transactions within the mortgage market.”
Fleming said this trend has surfaced in previous refinance booms, noting fraud risk reached a low point in November 2016 amid the refinance boom between fourth quarter 2015 and third quarter 2016, which pushed the share of refinance originations from 46 percent to 51 percent. Similarly, in 2012, overall fraud risk declined by 4.7 percent, as the mortgage rate declined from 3.9 percent to 3.6 percent between first quarter of 2012 and fourth quarter 2012 and the share of refinances increased from 68 percent to 72 percent.
“The 30-year, fixed mortgage rate continued to decline in August, which is likely to boost refinance demand even further,” Fleming said. “The number of existing households that would be refinance candidates would increase to 11.6 million at a mortgage rate of 3.5 percent–as the prevailing rate would be at least 0.75 percentage point lower than their current rate–compared with just 2.9 million households when the mortgage rate is 4.5 percent. As the mortgage market composition continues to shift toward refinance transactions in 2019, the risk of defect, fraud and misrepresentation will continue to decline.”
Other report findings:
–States with a year-over-year increase in defect frequency were Nebraska (34.8 percent), Iowa (25.0 percent), New York (19.7 percent), Rhode Island (13.4 percent) and Pennsylvania (13.3 percent). States with a year-over-year decrease in defect frequency were Florida (-11.2 percent), Vermont (-9.9 percent), Arkansas (-7.7 percent), Arizona (-6.8 percent) and Texas (-6.3 percent).
–Among major metros, markets with the greatest year-over-year increase in defect frequency were Buffalo, N.Y. (20.3 percent), Pittsburgh (15.5 percent), Kansas City, Mo. (12.5 percent), San Jose, Calif. (11.9 percent), and New York (11.8 percent). Markets posing year-over-year decreases in defect frequency were Houston (-19.1 percent), Jacksonville, Fla. (-17.0 percent), Orlando, Fla. (-16.5 percent), San Diego (-16.5 percent) and Tampa, Fla. (-14.0 percent).