The risk of defects, fraudulence and misrepresentation in mortgage applications decreased 2.4% in May compared with April and was down 3.6% compared with May 2017, according to First American’s Loan Application Defect Index.
What’s more, the risk of defects was down 21.6% from the high point of risk in October 2013.
The the risk of defects in applications for refinances was flat compared with the previous month but up 4.4% compared with a year earlier.
The risk of defects in applications for purchases was down 4.6% compared with April and down 7.8% compared with May 2017.
It is unusual for defect risk to decrease when the share of applications for purchases is increasing. That’s because applications for purchases generally carry higher defect risk, because the information is being provided by the borrower to the lender for the first time.
Mark Fleming, chief economist for First American, says one reason defects are decreasing in purchase applications is because of the new digital technology lenders are now using.
“It’s likely that all of the investment in more digitized, automated and efficient mortgage manufacturing and underwriting technology that’s been made in recent years is beginning to pay off,” Fleming says in a statement. “Now the question is, how much lower will it go?”
As Fleming points out, the fact that application defects are decreasing in a purchase market is a positive development.
“By now, everyone in the mortgage industry is aware that we are entering a market that will be dominated by purchase demand for the next several years,” Fleming says. “According to the latest Mortgage Bankers Association forecast, refinance transactions will make up 28 percent of total mortgages originated in 2018 and is forecasted to drop to 23 percent by 2020.
“This is, of course, due to the current environment of increasing mortgage rates that follows years of persistently low rates,” he says. “Until last month, the average rate for a 30-year fixed mortgage had remained below 4.5 percent for 80 consecutive months. And since most homeowners have benefited from the low-rate environment, they now have little financial incentive to refinance, or sell and buy again. With mortgage rates continuing to rise, the financial value of keeping their current low-rate mortgages is likely to increase.
“There’s no better time to have loan application misrepresentation, defect and fraud risk on purchase transactions on the decline than when the market share of purchase transactions is rising,” Fleming adds.
