First American says market dynamics will dictate fraud risk outlook
A leading estimate of the frequency of defects, fraudulence, and misrepresentation in information given in mortgage applications, has fallen for the fifth consecutive month.
The First American Loan Application Defect Index decreased 3.9% month-over-month and 5.2% year-over-year in August as lower rates drove refinance activity higher. For refinances, the index was down 4.3% from July.
“The overall Defect Index has not been this low since January 2017. However, falling defect risk is a recent phenomenon,” said First American chief economist Mark Fleming. “In late 2018 and early 2019, overall defect risk rose at a fast pace and continued to do so until reaching a peak in February 2019.”
The index had risen by 25% in the period from July 2018 to February 2019 but then changed direction. This was due to the rising mortgage rates in the second half of 2018 reducing the less-risky refinance applications, along with hurricanes and wildfires.
But in 2019, there has been a shift towards buyers’ markets while homebuying power has been increased by rising incomes and lower mortgage rates.
And then there is the increase in refis.
“The 30-year, fixed-rate mortgage in August averaged 3.6%, the lowest since October 2016,” said Fleming. “According to estimates, 11.6 million existing households would be refinancing candidates at a mortgage rate of 3.5%, compared with just 2.9 million households when the mortgage rate is 4.5%.”
Low inventory could be risky
Although housing market conditions have helped reduce defect risk, Fleming says that the tightening inventory while mortgage rates make homeownership more attractive, could have a detrimental effect.
“Increasing demand against limited supply means that the housing market could be poised for another strong sellers’ market, which could create a spike in fraud risk,” he said. “The good news is that mortgage rates fell further in September, indicating even more refinances may be on the way. Stronger buyers’ market conditions and a rising share of refinance transactions – that’s what we need to maintain declining fraud risk momentum in 2019.”
