Defect risk index shows year-over-year increase
There’s been a rise in an index of estimated frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications.
The First American Loan Defect Loan Application Index increased 1.2% in April compared to a year earlier, although it is 19.6% below the high point of risk in October 2013.
For refinances, the index gained 1.4% month-over-month and gained 7.6% year-over-year. For purchase applications, there was a month-over-month decrease of 2.2% but a rise of 2.2% year-over-year.
Sharp decline in income-specific risk since 2013
The new underwriting rules introduced in 2013 require mortgage lenders to make a reasonable and good faith determination of the consumer’s ability to repay their mortgage.
First American’s chief economist Mark Fleming says that these rules have had a clear and significant effect on defects.
“The rules have reduced the incentive to fraudulently misrepresent one’s income, a benefit to lenders,” he said. “The ability-to-repay standards are essentially the mortgage fraud risk prevention equivalent of using a steering wheel lock to dissuade potential car thieves.”
Fleming added that mortgage lenders enhanced their manufacturing and underwriting practices relating to a consumer’s income and ability to repay their mortgage.
“The intent of the ability-to-repay standards was to help consumers secure mortgages that they can reasonably expect to repay. The ancillary benefit has been fewer loan application defects, and a steering wheel lock on mortgage fraud risk,” he said.
The five states with the greatest year-over-year increase in defect frequency are: Arkansas (+16.7%), Wyoming (+13.5%), New Mexico (+13.0%), Virginia (+12.2%), and Maryland (+10.8%).
The five states with the greatest year-over-year decrease in defect frequency are: South Carolina (-13.3%), Louisiana (-12.9%), Minnesota (-10.6%), Alabama (-10.0%), and Vermont (-9.6%).
