Ethical issues with mortgage applications dropped in May, continuing a years-long downswing, according to the latest First American Loan Application Defect Index.
The index, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, decreased 2.7 percent in May and was down 10 percent compared to May of 2015. The downward trajectory is nothing unusual, given that apart from two blips, the index has steadily decreased since October of 2013. Since then, when the index was at its highest, the defect risk has dropped 28.4 percent.
Owner-occupied loans are 30 percent less risky than investor loans. Single family properties are 11 percent less risky than condos, and FHA loans are 15 percent less risky than conventional loans, the report found.
Year over year, Michigan’s defect risk dropped a mighty 27.5 percent, followed by Florida’s 20 percent. West Virginia, New Mexico, and Delaware rounded out the year’s most improved markets, each seeing risk decrease by about 16 percent.
Not all states were down over these past 12 months. North Dakota’s defect risk increased 19.3 percent since last year. Maine and Missouri each increased 10 percent, and Utah and Oklahoma increased about 5 percent each.
Locally, Detroit’s risk dropped 33 percent since last year; while Jacksonville and Miami each dropped just more than 20 percent. Hartford decreased 19 percent and Buffalo dropped 17.6 percent.
St. Louis saw the biggest year-to-year increase of 16 percent.
“While we have often stated that location matters, it is important to keep in mind that part of the locational variances in loan defect risk among markets is due to the unique mix of loan applications in each market,” said Mark Fleming, chief economist at First American. “We expect misrepresentation and fraud risk to move higher with more purchase, investor and condominium transactions. The loan application mix influences the Defect Index, even when compliance drives the overall trend down.”
First American’s Defect Index for refinance transactions declined 3.1 percent month-over-month, and is 10 percent lower than a year ago. The Defect Index for purchase transactions also declined, 2.4 percent month-over-month, and is down 11.4 percent compared to a year ago. According to First American, defect risk on refinance transactions declines faster for purchase transactions‒‒38 percent versus 22 percent, respectively, since their peaks in late 2013.
Fleming credited better technology and compliance standards in the loan application process, along with more time spent underwriting each loan application‒‒which, he admitted, could be increasing the cost of loan production and reducing profitability for lenders, but is ramping up loan quality.
“Fewer defects and less misrepresentation will reduce repurchase risk and expenses for underwriters in the future,” he said.