Defect Risk Down for 1st Time in 8 Months
First American Financial Corp., Santa Ana, Calif., said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 4.2 percent in April from March, marking the first monthly decline since last July.
The company’s monthly Loan Application Defect Index noted, however, from a year ago defects rose by 11 percent, but down y b10.8 percent from the high point of risk in October 2013.
The report said the Defect Index for refinance transactions decreased by 3.5 percent from March but rose by 16.9 percent from a year ago. The Defect Index for purchase transactions decreased by 4.0 percent from March but rose by 10.3 percent from a year ago.
“Decreasing mortgage rates contributed to an increase in inventory, reducing the competitive pressure on the housing market, as well as contributing to an increase in lower-risk refinance transaction,” said First American Chief Economist Mark Fleming. “The two competing trends that resulted in a flat fraud risk last month were the increasing share of less risky refinance transactions working to decrease overall fraud risk, and the continuation of the hot sellers’ market, motivating buyers to misrepresent information in order to qualify for a bigger mortgage and increase overall fraud risk.”
Fleming noted the mix of refinance and purchase activity fluctuated in April; refinance activity increased in the first half of the month as mortgage rates declined. However, lower mortgage rates also fueled an increase in purchase transactions, as buyers took advantage of their increased house-buying power. “While loan application defects can happen on both purchase or refinance transactions, there is a higher propensity for fraud and misrepresentation with purchase transactions,” he said.
Fleming said the future of fraud and misrepresentation risk is tied closely to mortgage rates. “Increased inventory reduces competitive pressures and misrepresentation risk, alongside the rising share of lower-risk refinance transactions,” he said. “It remains to be seen if mortgage rates, now flirting with 4 percent, will go any lower. If so, we may anticipate the continued downward trend in defect risk and misrepresentation, with further increases in refinance transactions and inventory, resulting in less pressure on the market.”
The report said states with a year-over-year increase in defect frequency in April were New York (37.3 percent), Nebraska (37.0 percent), Iowa (35.0 percent), Hawaii (33.7 percent) and West Virginia (31.1 percent). Two states saw year-over-year decreases in defect frequency: Arkansas (-4.8 percent) and Florida (-1.1 percent).
Among largest metros, markets with the greatest year-over-year increase in defect frequency were Buffalo, N.Y. (36.9 percent), Pittsburgh (31.3 percent), Richmond, Va. (30.1 percent), Cincinnati (29.3 percent) and New York (26.3 percent). Markets with year-over-year decrease in defect frequency were Jacksonville, Fla. (-11.6 percent), Houston (-8.5 percent), Orlando, Fla. (-7.4 percent), San Diego (-4.3 percent) and Miami (-2.0 percent).
