Mortgage Loan Application Defects Head Up in July

First American Financial Corporation’s Loan Application Defect Index for July 2015 found that the mortgage loan defect rate rose 4.9 percent in July compared to June.

The Defect Index, which estimates the frequency of defects in the information submitted in mortgage loan applications and reflects them over time, by geography and by loan type increased 4.9 percent in July and decreased by 5.6 percent as compared to this time last year. The index is down 17.5 percent from the high point of risk in September 2013.

"After seeing improvement in the national mortgage loan defect trend last month, the index has returned to the trend of increasing risk that we have observed since the beginning of 2015,” said Mark Fleming, chief economist at First American.

In recent months, the Defect Index for refinance transactions has increased dramatically, while still 6.3 percent lower than a year ago, its estimated defect incidence is up 8.7 percent month-over-month and 7.1 percent over the last three months. Meanwhile, the adjustable-rate mortgages (ARM) continue to have consistently higher levels of application defect and fixed-rate mortgage defect risk surged with an 8.4 percent increase from last month.

According to First American, the five states with the highest month-over-month increase in defect frequency are: Oklahoma (+14 percent), Hawaii (+13.1 percent), Louisiana (+10 percent), Texas (+10 percent), and Colorado (+9.3 percent).

Among the top five states with the highest month-over-month decrease in defect frequency were: Iowa (-11.4 percent), Massachusetts (-5.4 percent), Alaska (-5.3 percent), the District of Columbia (-4.7 percent), and West Virginia (-3.1 percent), the report found.

“What remains consistent from last month is the concentration of defect risk in the same handful of key markets in the south, particularly in Florida and Texas, as well as in the Northeast and upper Midwest," Fleming said. "This month, major metropolitan areas in Florida and Texas continue to produce defect frequency levels well above the current national level."

Click here to view First American’s Loan Application Defect Index.