First American: Automated Verification Tools Are Driving Down Loan Defect Rate

The rate of defects (i.e., errors, whether intentional or not) in loan applications remained unchanged in November compared with October, according to First American Financial Corp.’s Loan Application Defect Index.

However, the rate of defects was down 12.8% compared with November 2015 and down 33.3% from the high point of risk in October 2013.

The rate of defects for refinances decreased 3.4% compared with October and decreased 16.4% compared with November 2015.

The rate of defects for purchases was unchanged compared with October but was down 5.9% compared with a year earlier.

Mark Fleming, chief economist at First American, says automated verification tools are helping to drive down the rate of defects in all loan applications.

“The long and consistent downward trend in loan application defect and misrepresentation risk paused [in November] after falling in seven of the [previous] eight months,” Fleming says in a statement. “Yet, I expect the risk trend to continue its downward trajectory in 2017.

“The Day 1 Certainty initiative at Fannie Mae and incorporation of similar automated verification tools at Freddie Mac are likely to have a significant positive impact on mortgage loan application defect and misrepresentation risk in the next year,” Fleming says.

“Next year is expected to be a transition year for loan application defect, misrepresentation and fraud risk,” he adds. “Rising rates in the market will drive a transition to more purchases relative to refinances and more adjustable-rate mortgages relative to fixed-rate loans. All other factors being equal, both of these trends point to increased defect, misrepresentation and fraud risk.”

To view the full report, click here.


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