Due to new tech and policies, loan defects have plummeted from their high point
Mortgage loan defects grew less frequent in February as lenders continued to implement new loan technologies and underwriting practices.
First American's Defect Index fell by 4.6% month over month and 34.7% year over year. From its high point of risk in October 2013, the index was down 39.2%.
For refinance transactions, the index dropped by 5.5% in February, and was 39.5% lower than in February last year. The defect index for purchase transactions also dipped, down 2.6% month over month and down 23.2% year over year.
No states reported an annual increase in defect frequency. The five states with the greatest year-over-year drop in defect frequency included West Virginia (-51%), North Carolina (-42.9%), Indiana (42.3%), Montana (42.2%), and Virginia (42.2%).
Policies and technology innovation have been instrumental to the decline in defects, fraudulence, and misinformation in the information submitted in mortgage loan applications.
First American Chief Economist Mark Fleming said that the Consumer Finance Protection Bureau's implementation of its ability-to-repay rules in 2013 marked the start of a new income-underwriting era.
"The ability-to-repay rules discouraged the use of high-risk loan products that were common during the housing boom," he said. "Instead, mortgage lenders are required to make a reasonable and good-faith determination of the consumer’s ability to repay. To meet the new ‘ability-to-repay’ standard, mortgage lenders standardized the mortgage loan manufacturing and underwriting practices associated with the determination of a consumer’s ability to repay."
The policy led to a continuous decline in income-specific defect and fraud risk since then, according to Fleming. Additionally, technology also played a crucial role in reducing fraud.
“The mortgage finance industry’s significant investment in financial technology is the other major driver of the long-run decline in fraud risk. For example, advancements in mortgage technology allow lenders to compare a borrower’s information against employment databases and other data sources, and algorithms can inspect whether recent bank account deposits are consistent with a borrower’s paystubs,” said Fleming. “There’s a lot of uncertainty in the economy and mortgage markets these days. While fraud risk will never be zero, it is certainly in a better place today than it was nearly a decade ago. Today’s housing market of today benefits from new technology and policy guardrails against fraud and defect risk, innovations that will serve the industry well in the uncertain days ahead.”
