The risk of ‘defects’ found in loan applications decreased by 1.2% in September compared with August and decreased 9.0% compared with September 2014, according to First American Financial Corp.'s Loan Application Defect Index, which measures mortgage loan defect rates over time by geography and loan type.
What's more, the risk of loan defects in applications in September was down 20.6% from the high point of risk in October 2013. It was the third straight month that the risk of defects decreased.
Application defects can include either simple errors and omissions or deliberate fraud.
Although the index is up 3.8% from the low point for defect risk set in March, it remains well below the level of defect risk observed in the pre-crisis years.
The level of risk in applications for refinances decreased 1.4% compared with August and decreased 10.0% compared with September 2014. The level of risk in applications for purchases decreased 1.1% month over month and decreased 8.4% year over year.
First American notes that the risk of defects in applications for refinances has decreased more dramatically compared with the risk of defects in applications for purchases. Since the peak of defect risk in 2013, the defect rate for refinances has decreased 29%, whereas the defect rate for purchases has decreased 16.3%.
‘A trend is beginning to emerge nationally, as defect risk has now declined for three months in a row, mitigating some of the increased risk that was observed in the early part of the year,’ says Mark Fleming, chief economist at First American, in a statement. ‘The defect risk gap remains pronounced by loan purpose. Since late 2013, defect risk has declined more rapidly in refinance transactions than in purchase transactions. As rates increase and a more purchase-based mortgage market emerges next year, defect risk will rise overall, as it is more common on purchase transactions.’
States that saw increases in defect frequency in September included North Dakota (up 3.4%), Oklahoma (up 2.1%), Wyoming (up 1.6%), Montana (up 1.3%) and Maryland (up 1.3%).
States that saw decreases in defect frequency included West Virginia (down 6.6%), Washington, D.C. (down 4.9%), New Hampshire (down 4.6%), Iowa (down 4.6%) and Connecticut (down 4.6%).
For more, including a breakdown of application defect risk by metropolitan statistical area, click here.