The overall risk of defects in mortgage applications was flat in November compared with October but was up 22.1% compared with November 2016, according to First American Financial Corp.’s monthly Loan Application Defect Index.
However, the overall risk was down 18.6% compared with the high point of risk in October 2013.
Looking just at applications for refinances, defect risk was unchanged compared with October but was up 23.2% compared with a year earlier.
The risk of defects in applications for purchases increased 1.1% month over month and was up 13.8% compared with November 2016.
Mark Fleming, chief economist for First American, forecasts that the level of risk for defects will remain relatively flat headed into 2018.
“As 2017 ends and we look forward to 2018, there is reason to be optimistic about defect, fraud and misrepresentation risk,” Fleming says. “After a year of significant change, defect risk has stabilized, with no change in the overall level of defect risk in three of the last four months.”
Fleming points out that the index “was at its lowest point ever in November 2016, before defect risk surged by 24 percent in the following seven months, one of the fastest changes the defect index has recorded since its inception in 2011.”
That past increase, he says, “was primarily driven by an increase in the share of purchase mortgage transactions, which tend to carry more risk, and more transactions in riskier markets.”
“This fall, we have seen some moderation and stabilization of these market dynamics and, as a result, no further increase,” he adds.
In keeping with the holiday season, this month’s report takes a look at the states where defect risk is highest and lowest, dubbing them the “naughty” and “nice” states.
“Naughty” states, which had the highest levels of defect risk in November, included Arkansas, Idaho, North Dakota, Florida and Montana.
“Nice” states, which had the lowest levels of defect risk, included New Hampshire, Connecticut, Massachusetts, Pennsylvania and Maine.
Of the “nice” states, Fleming says, “Interestingly, these states are all in the Northeast. In fact, New York is only slightly ‘less nice’ (riskier) than the five states that made the ‘nice’ list, and Vermont is the only ‘naughty’ market in the region.”
As shown by the Defect Index map included in the report, “defect risk, or the lack thereof, is clearly concentrating regionally,” Fleming says. “The Northeast and California are generally low-risk, while the South, Southeast and upper Midwest are generally higher-risk.”