Defect Risk Declines for 2nd Straight Month

First American Financial Corp., Santa Ana, Calif., said its May Loan Application Defect Index fell by 5.5 percent from April, the second consecutive monthly decline.

For refinance transactions, the Index decreased by 7.2 percent from April but rose by 8.5 percent from a year ago. For purchase transactions, the Index decreased by 6.3 percent from April and rose by 8.4 percent from a year ago.

From a year ago, the Defect Index rose by 7.5 percent. From its high point of risk in October 2013, the Index is down by nearly 16 percent.

“Last month, we predicted that if mortgage rates continued to fall, it may help ease the pressure on fraud risk,” said First American Chief Economist Mark Fleming. “Indeed, the 30-year, fixed-rate mortgage fell to its lowest level since January 2018, and fraud risk has fallen alongside it.”

Fleming noted following the strong sellers’ market conditions throughout 2018, market dynamics have shifted slightly toward buyers in 2019. Mortgage rates began to decline in January 2019 and are now lower than one year ago. “Meanwhile, household income, the other component of house-buying power, has continued to increase, rising 2.8 percent in May compared with one year ago,” he said. “Falling mortgage rates and rising household income have boosted consumer house-buying power.”

The report said states with a year-over-year increase in defect frequency were Nebraska (39.1 percent), Hawaii (30.1 percent), Iowa (29.9 percent), New York (27.6 percent) and Pennsylvania (23.4 percent). States with a year-over-year decrease in defect frequency were Arkansas (-9.7 percent), Vermont (-4.8 percent), Florida (-3.3 percent), Utah (-2.3 percent) and Arizona (-1.3 percent).

Among metros, markets with the greatest year-over-year increase in defect frequency were Pittsburgh (31.7 percent), Buffalo, N.Y. (30.2 percent), New Orleans (24.7 percent), Cincinnati (20.5 percent) and New York (+19.0 percent). Markets with year-over-year decrease in defect frequency were Jacksonville, Fla. (-13.0 percent), Houston (-12.0 percent), San Diego (-9.0 percent), Orlando, Fla. (-8.6 percent) and Los Angeles (-4.2 percent).