While defects and fraud were up in January, they’re still down dramatically from their 2013 peak. However, as the mortgage market shifts to purchase transactions, defect and fraud risk will also rise
Defects, fraud and misrepresentation found in mortgage loan applications increased 5.8% in January, according to new data from First American Financial Corporation.
Year-over-year though, First American’s Defect Index declined by 3.9%, and decreased by 28.4% from October 2013, which had a risky high point.
Month-over-month, defects in refinance transactions went up by 3.5%, but was still 9.2% lower than the same time last year; defects in purchase transactions rose by 2.5% – 1.2% lower than last year.
“This month, the Loan Application Defect Index continued the upward trend that started in December 2016.
The overall index increase is largely the result of waning refinance activity in the mortgage market,” said Mark Fleming, chief economist at First American. “Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the increased risk of misrepresentation and fraud is due to the increasing share of higher-risk purchase transactions within the mortgage market.
“While technology adoption has reduced risk for both purchase and refinance transactions, part of the overall decline in risk has been due to the recent dominance of refinance activity relative to purchase activity,” Fleming added. “As the mortgage market composition continues to shift toward purchase transactions in 2017, the risk of defect, fraud and misrepresentation will also increase. In real estate, location matters. In defect, misrepresentation and fraud risk, loan purpose matters.”
Louisiana, Mississippi, Montana, North Dakota and Wyoming rated the highest year-over-year increase in defect frequency, while California, Connecticut, Michigan, Rhode Island and South Carolina had the greatest decrease in defect frequency.
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Year-over-year though, First American’s Defect Index declined by 3.9%, and decreased by 28.4% from October 2013, which had a risky high point.
Month-over-month, defects in refinance transactions went up by 3.5%, but was still 9.2% lower than the same time last year; defects in purchase transactions rose by 2.5% – 1.2% lower than last year.
“This month, the Loan Application Defect Index continued the upward trend that started in December 2016.
The overall index increase is largely the result of waning refinance activity in the mortgage market,” said Mark Fleming, chief economist at First American. “Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the increased risk of misrepresentation and fraud is due to the increasing share of higher-risk purchase transactions within the mortgage market.
“While technology adoption has reduced risk for both purchase and refinance transactions, part of the overall decline in risk has been due to the recent dominance of refinance activity relative to purchase activity,” Fleming added. “As the mortgage market composition continues to shift toward purchase transactions in 2017, the risk of defect, fraud and misrepresentation will also increase. In real estate, location matters. In defect, misrepresentation and fraud risk, loan purpose matters.”
Louisiana, Mississippi, Montana, North Dakota and Wyoming rated the highest year-over-year increase in defect frequency, while California, Connecticut, Michigan, Rhode Island and South Carolina had the greatest decrease in defect frequency.
Related stories:
Finally adapting to TRID ? Mortgage defects fall for first time in a year
Mortgage fraud falling as compliance rules tighten
