Healthy Economy Helped Reduce Mortgage Application Defect Risk in September

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The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage applications decreased by 5.5% in September compared with August and was down 11.5% compared with September 2018, according to First American’s Loan Application Defect Index.

Driving the decrease in risk was an increase in refinance transactions resulting from lower mortgage rates. Refinance transactions generally carry less risk because borrower information has been previously submitted and verified.

However, as Mark Fleming, chief economist for First American, explains, the strong job market and rising family incomes have also played a role in the reduction in application fraud risk.

“While the rising share of refinance transactions and weakening sellers’ market conditions have helped reduce fraud risk in 2019, there are some other factors at play as well,” he says. “Rising household income driven by the strong labor market and lower mortgage rates have increased consumer house-buying power and helped boost consumer confidence. As consumer house-buying power and consumer confidence swell amid the strong labor market, the pressure to misrepresent income and employment in mortgage applications declines.”

“The overall defect index has not been this low since December 2016,” Fleming adds. “In fact, the defect index for purchase transactions reached an impressive milestone – the lowest point since we began tracking in January 2011.”

The risk of defects in refinance transactions decreased by 4.5% in September compared with August and was down 10.0% compared with September 2018.

The risk of defects in purchase transactions decreased by 2.6% compared with the previous month and was down 6.3% compared with a year earlier.

As of the end of September, the overall defect index was down 32.4% from the high point of risk in October 2013.

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