The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications during April decreased by 4.2% from March, according to new data from First American Financial Corp.’s Loan Application Defect Index This represents the first time in eight months that the index recorded a month-over-month decline. However, the Defect Index was also up by 11% from one year earlier but down 10.8% from the high point of risk in October 2013.
During April, the Defect Index for refinance transactions decreased by 3.5% compared with previous month but rose 16.9% compared with one year earlier. The Defect Index for purchase transactions decreased by 4% compared with the previous month and was 10.3% higher than the April 2018 level.
“Decreasing mortgage rates contributed to an increase in inventory, reducing the competitive pressure on the housing market, as well as contributing to an increase in lower-risk refinance transactions,” said Mark Fleming, Chief Economist at First American.
“The two competing trends that resulted in a flat fraud risk last month were the increasing share of less risky refinance transactions working to decrease overall fraud risk, and the continuation of the hot sellers’ market, motivating buyers to misrepresent information in order to qualify for a bigger mortgage and increase overall fraud risk.”
According to Fleming, the future of fraud and misrepresentation risk is tied closely to mortgage rates. Increased inventory reduces competitive pressures and misrepresentation risk along with the rising share of lower-risk refinance transactions. If interest rates go any lower, “we may anticipate the continued downward trend in defect risk and misrepresentation, with further increases in refinance transactions and inventory, resulting in less pressure on the market.”