First American: Risk Of Mortgage Defects Decreased For Third Straight Month

The risk of defects in mortgage applications decreased 2.5% in October compared with September and decreased 10.2% compared with October 2014, according to First American Financial Corp.'s Loan Application Defect Index, which measures estimated defect rates by time, geography and loan type.

The level of defect risk in October was down 22.3% compared with the high point of risk in October 2013, according to the firm's data. It was the third consecutive month that defect and misrepresentation risk decreased on a month-over-month basis.

The risk of mortgage fraud in applications for purchases decreased 2.3% compared with September and decreased 10.5% compared with a year earlier.

Meanwhile, the defect risk for refinances continues to decrease at a more rapid rate. According to the report, overall defect risk for refinances decreased 31% since the peak of defect risk in 2013, while the level of risk for purchases decreased 18.3% for the same time period.

Helping to drive the recent reduction in defect risk is a significant decrease in income fraud. This is because the Consumer Financial Protection Bureau's ability-to-repay/qualified mortgage rules – combined with new, automated income verification tools – have made it very difficult for borrowers to misrepresent their annual incomes.

‘Fraudulent and misrepresentative loan applications are continuing to decline, as our risk index is trending toward the lowest point we have recorded in the last five years,’ says Mark Fleming, chief economist at First American, in a statement. ‘The reduction in risk is occurring across property type, occupancy, loan purpose and whether [it is] a conforming conventional or Federal Housing Administration, Veterans Affairs, [or] U.S. Department of Agriculture loan.’

Fleming adds that although fraud risk is declining overall, ‘there are still categories of loans that are riskier. In particular, self-reported investor, adjustable-rate mortgage, purchase and multi-unit transactions have heightened defect, fraud and misrepresentation risk.’

It should be noted that certain defects contained in mortgage applications are not fraud, per se, but rather, are errors on the part of applicants.

First American's Loan Application Defect Index is an interactive tool that can be tailored to showcase trends by category, including amortization type, lien position, loan purpose, property and transaction types, as well as state and market comparisons of mortgage loan defect levels.

States with the highest month-over-month increases (or smallest decreases) in defect frequency for October included North Dakota (up 3.3%), Alaska (0.0%), Iowa (0.0%), Missouri (0.0%) and Illinois (down 1.3%).

States with the highest month-over-month decreases in defect frequency included Michigan (down 6.1%), Vermont (down 5.2%), California (down 4.9%), Louisiana (down 4.9%) and Connecticut (down 4.8%).

For more, including a breakdown of fraud risk by metropolitan area, click here.


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