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Downward Trend for Defects in Loan Applications

According to First American Financial Corporation’s Loan Application Defect Index, the frequency of defects, fraud, and misrepresentation submitted in mortgage loan applications in July fell 5% from the prior month.  

The Defect Index, however, is unchanged from July 2018, but is 25.5% lower than its high point of risk in October 2013.

First American reports the frequency of fraud in refinance transactions decreased 4.2% from the month prior and is also unchanged from 2018.

Purchase transactions saw a decline in defect risks of 3.6% from June and the chance of risks rose 1.3% year-over-year. 

“The Loan Application Defect Index for purchase transactions continued its downward trend, declining 3.6% in July compared with June, the fourth consecutive month defect risk in purchase transactions has fallen,” said Mark Fleming, Chief Economist at First American. “The Defect Index for refinance transactions also fell 4.2% compared with the previous month.

Fleming said falling mortgage rates triggered a 25% increase in refinances month-over-month and a 60% annual rise. This trend is not new, Fleming added, saying fraud risk reached a low point in November 2016 amind a refinance surge. 

“Similarly, in 2012, overall fraud risk declined 4.7%, as the mortgage rate declined from 3.9% to 3.6% between the first quarter of 2012 and fourth quarter of 2012 and the share of refinances increased from 68% to 72%,” Fleming said. 

Freddie Mac reported mortgage organizations are expected to reach $2 trillion in 2019 due to a rise in refinancing. 

“Despite fears of an economic slowdown, the U.S. labor market stands firm. Specifically, jobless claims are near historic lows,” said Sam Khater, Feddie Mac’s Chief Economist. “This strong labor market, along with mortgage rates at three-year lows and consumer confidence holding strong, will set the stage for continued improvement in the housing market heading into the fall.”

Freddie Mac forecasts the 30-year fixed rate mortgage to remain around 3.6% for the remainder of 2019 and through Q2 2020. The GSE announced the average rate of a 30-year fixed rate mortgage for the week ending August 29 was 3.58%. 

First American revealed Nebraska had the highest annual increase in defect frequency at 34.8%. Iowa was close behind at 25%, and was followed by New York (19.7%), Rhode Island (13.4%), and Pennsylvania (13.3%). 

The report states Florida largest decreases in frequency defects at 11.2%. Vermont (-9.9%), Arkansas (-7.7%), Arizona (-6.8%), and Texas (-6.3%) also showed decreases. 

Of the 50 largest Core Based Statistical Areas (CBSAs) Buffalo, New York, had the highest year-over-year increase in defect frequency at 20.3%. Houston, Texas’, 19.1% decline was the highest in the nation.

About Author: Mike Albanese

A graduate of the University of Alabama, Mike Albanese has worked for news publications since 2011 in Texas and Colorado. He has built a portfolio of more than 1,000 articles, covering city government, police and crime, business, sports, and is experienced in crafting engaging features and enterprise pieces. He spent time as the sports editor for the "Pilot Point Post-Signal," and has covered the DFW Metroplex for several years. He has also assisted with sports coverage and editing duties with the "Dallas Morning News" and "Denton Record-Chronicle" over the past several years.
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