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Getting Risky: Defects Rise Slightly

[1]The proper management of risk can bring great rewards, while the careless dismissal of conducting risky business can lead to devastating losses. The lack of prudence in dealing with risk in 2008 directly led to the widespread default of mortgage payments, causing the Great Recession to unfold in the U.S.

First American Financial Corporation [2] released their proprietary First American Loan Application Defect Index [2] for the month of December, which showed a 1.5 percent increase from November in the frequency of defects, fraud, and misrepresentation of the information individuals provided while applying for mortgage loan applications. The Defect Index measures the frequency of bad information by examining loan applications which were applied for using the First American FraudGuard system.

"This month, the Loan Application Defect Index moved modestly higher on increases in risk for purchase and refinance applications, in combination with the continuing shift toward a purchase-dominated market," stated First American chief economist Mark Fleming.

The increase in risk may seem like a good reason to worry, but when compared to December 2015, the measured level of risk fell 9.2 percent. Furthermore, December 2016’s Defect Index is down 32.4 percent when compared to the high point incurred in October of 2013.

As Fleming notes, "Risk is always relative. Even the highest risk markets today are well below the risk levels of many markets in 2011.” He goes on to state that any significant rise in the amount of risk seen in 2017 will likely be countered by advancements in the validation methods used for assessing the informational accuracy of loan applications.

“One month’s change doesn’t necessarily signal a trend, but it bears watching to see if defect risk rises again next month,” Fleming stated.

The top three states with the highest year-over-year increase in their defect frequency were, Montana at 25.8 percent, Wyoming at 25 percent, and Maine, with an increase of 24 percent.