Risk of Loan App Defects Decline

On Friday, First American Financial Corporation released their July 2018 First American Loan Application Defect Index. Included in the Index is an estimate of the frequency of defects, fraudulence and misrepresentation in mortgage loan applications.

According to the Index, The frequency of defects, fraudulence and misrepresentation in loan applications fell 1.3 percent month over month, Defect-specific index fell the same percentage.  the seventh month in a row in which the Defect index has seen a drop. Year over year, the Defect Index decreased by 9.5 percent.

First American Chief Economist Mark Fleming notes that nationwide, defects are down, except in two markets.

“Nationally, the Defect Index decline of 7.3 percent in July relative to three-month moving average was driven by declining risk in all but two markets – New Orleans and Louisville, Ky. In every other market, loan application, misrepresentation, defect and fraud risk declined. In some markets the decline was substantial,” said Fleming. “In 39 markets, defect risk declined more than 5 percent, while the three-month decline in risk exceeded 10 percent in 11 markets.”

According to the Index, South Carolina, Minnesota, Alabama, Vermont, and North Dakota saw the greatest reduction in defect frequency, falling around 20 percent year over year in each state. On a more local level, the five markets with the largest year over year decrease in defect frequency are Birmingham, Alabama; Raleigh, North Carolina; Minneapolis, Boston; and Austin, Texas.

According to Fleming, financial technology played a large role in reducing risk of defects.

“The mortgage finance industry’s significant investment in financial technology to deliver a convenient, digital, highly automated and all-around better home-buying experience has also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk,” said Fleming. “The benefits of this investment are not geographically specific, so it’s no surprise that we see the impact of this investment in the vast majority of markets. The question is not where is defect risk declining, but when will it stop?”

Find the complete index and comments here.