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A Closer Look: Ties Between Mortgage Rates, Fraud, and Defects

The frequency of defects, fraud, and misrepresentation in the information submitted in mortgage loan applications fell by 1.4% in October compared to the month prior, according to First American Financial Corporation.  [1]

First American says the Defect Index is 13.9% lower than October 2018 and 33.3% below its high point of risk in October 2013. The index for refinance transactions declined by 3.2% compared to September and is down 14.1% compared to last year. 

The risk of defects for purchase transactions was unchanged from the prior month but is down 8.5% from 2018. 

“October was also the first month since November 2018 where the 30-year, fixed mortgage rate increased month over month. Examining any potential link between defect risk trends and mortgage rates may shed light on what to expect for defect risk in the near future,” said Mark Fleming, Chief Economist at First American. 

Fleming noted the risk between homebuying power and risk. He said homebuying power has been growing since December 2018 due to increasing income and declining mortgage rates. First American states the homebuying power reached $421,120 in September 2019—the highest point in the analysis dating back to 1990.

“Potential home buyers may feel more confident and less inclined to commit fraud when they are in a better financial position to purchase a home,” said Fleming. “In a supply-constrained market, a decline in house-buying power makes it more difficult for potential home buyers to compete with each other, so they may feel more pressure to misrepresent information on a loan application.

Two states posted annual increases in the frequency of defects—South Dakota (4.8%) and New York (2.4%). 

First American reported five states posted year-over-year decreases in defect frequency: Alaska (-34.4%); West Virginia (-22.5%); Virginia (-21.7); Delaware (-20.3%); and North Carolina (-20.2%). 

Of the 50 largest Core Based Statistical Areas just one—Hartford, Connecticut—recorded a year-over-year increase in defect frequency at 3.2%. 

Virginia Beach, Virginia, posted the largest year-over-year decline in defect frequency at 25.8%.