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How Loans are Getting Younger, Savvier, and Safer

housesMillennials get a lot of flak for a lot of things, but they're being credited for helping to make loans much less risky, according to the June  Loan Application Defect Index [1] from First American Financial Corp. [2]

As it turns out, the shift to accommodate millennial buyers has led to an investment in technology that has helped make the manufacture and underwriting of mortgage loans less risky, said First American Chief Economist Mark Fleming.

Millennials, Flemming said, “expect a convenient, digital, highly automated and all-around better home-buying experience. The mortgage finance industry has invested heavily in technology to meet this demand to compete for millennials’ mortgage loan business.”

Overall, Flemming said, the mortgage market is continuing to move away from refinances towards a predominantly purchase-oriented loan market. As it does so, First American's Defect Index for purchase transactions “has continued to decline, dropping 3.6 percent in the last month and 12.1 percent in the last year.”

This marks a six-month-long decline in defect, fraud and misrepresentation, and risk on purchase transactions, which have traditionally been considered higher risk, he said.

According to the report, the frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications dropped almost 4 percent from May to June and 8.3 percent compared to a year earlier. Taking a longer view, risk has dropped noticeably in the past five years. According to the report, the Defect Index is down 24.5 percent from the high point of risk, in October 2013.

Defects in refinance transactions were also down in June, almost 3 percent from May and a little more than 1 percent compared to a year earlier. The Defect Index for purchase transactions decreased by 3.6 percent compared to April, and 12.1 percent compared to a year ago.

“Not only is the national trend positive, but loan application defect, fraud and misrepresentation risk is declining in practically every market in the nation,” Fleming said. “Only five major metropolitan markets experienced an increase in overall defect, fraud and misrepresentation risk compared with a year ago. Many markets experienced significant declines of 10 percent or more.”

Three states—California, Virginia, and New Mexico—did see year-over-year defect increases. Each increase was about 1.5 percent. Meanwhile, South Carolina saw the largest drop in defects over the same time period, at 25 percent.