First American: August Loan Defects Down by 4%
First American Financial Corp., Santa Ana, Calif., said its monthly Loan Application Defect Index fell by 3.9 percent in August from July and by 5.2 percent from a year ago.
The Defect Index fell for the fifth consecutive month and is down by 28.3 percent from the high point of risk in October 2013.
First American said the Defect Index for refinance transactions decreased by 4.3 percent compared to July and by 4.3 percent from a year ago. The Index for purchase transactions decreased by 3.8 percent from July and by 2.5 percent from a year ago.
First American Chief Economist Mark Fleming noted the overall Defect Index has not been this low since January 2017. “However, falling defect risk is a recent phenomenon,” he said. “In late 2018 and early 2019, overall defect risk rose at a fast pace and continued to do so until reaching a peak in February 2019.”
What’s different this time, Fleming said, is that in the second half of 2018, rising mortgage rates reduced the share of refinance transactions, leading to a greater share of higher-risk purchase transactions. “Additionally, hurricanes and wildfires in the second half of 2018 contributed to climbing defect risk,” he said. “Natural disasters go hand-in-hand with rising loan application defect risk, as natural disasters create greater opportunity for misrepresentation of collateral condition. But, 2019 provided a fresh start.”
In addition to fewer natural disasters, Fleming cited two primary reasons why 2019 has been the year of declining fraud risk. The first is the market dynamic shift toward buyers. “Following the strong sellers’ market conditions throughout 2018, market dynamics shifted slightly toward buyers in 2019,” he said. “Mortgage rates began to decline in January 2019 and are 0.8 percentage points lower in August than January. Meanwhile, household income, the other component of house-buying power, has continued to increase, rising 1.5 percent in August compared with January 2019…potential home buyers feel less pressure to misrepresent information on a loan application when strong sellers’ market conditions wane, as the market is less competitive.”
The second factor, Fleming noted, is refinancings. “For many homeowners, the most important consideration when deciding to refinance is whether the mortgage rate is sufficiently lower than their existing rate,” he said. “As a result of lower rates, refinance applications are up 148 percent compared with one year ago, according to the latest MBA mortgage applications survey. Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, so the reduced risk of fraud and misrepresentation in 2019, and August in particular, is largely due to the increasing share of lower risk refinance transactions within the mortgage market.”
The report said states with a year-over-year increase in defect frequency are Nebraska (23.2 percent), Iowa (17.6 percent), South Dakota (13.9 percent), New York (12.8 percent) and North Dakota (8.4 percent). States with a year-over-year decrease in defect frequency are Florida (-16.7 percent), Delaware (-13.8 percent), Texas (-13.8 percent), Vermont (- percent) and Maryland (-11.7 percent).
Among the largest 50 metros, markets with the greatest year-over-year increase in defect frequency are Buffalo, N.Y. (8.6 percent), Kansas City, Mo. (6.8 percent), New York (5.2 percent), Hartford, Conn. (3.1 percent), and San Jose, Calif. (2.9 percent). Markets with the greatest year-over-year decrease in defect frequency are Houston (-22.7 percent), San Diego (-21.2 percent), Orlando, Fla. (-20.9 percent), Jacksonville, Fla. (-20.2 percent), and Tampa, Fla. (-18.4 percent).
