The April 2018 First American Loan Application Defect Index – a proprietary score that measures the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications – shows flat month-to-month numbers but a slight increase (1.2%) year over year.
Although the Defect Index increased by 1.2% from April 2017, it is down 19.6% from the high point of risk in October 2013.
The index for refinance transactions increased by 1.4% compared with March 2018 and is 7.6% higher than a year ago. For purchase transactions, the decrease was 2.2% compared with the previous month but up 2.2% compared with a year ago.
“Since the ability-to-repay rules were issued, there has been a precipitous and significant decline in income-specific mortgage loan application misrepresentation, defect and fraud risk,” says Mark Fleming, chief economist at First American. “In fact, our income-specific metric within the Loan Application Defect Index (LADI) reached its peak in December 2012, one month before the rules were issued.
“By September 2013, nine months later, the income-specific defect risk metric declined 33 percent, as lenders implemented new loan manufacturing and underwriting practices in preparation for the effective start of rule in January 2014. Since then, income-specific defect and fraud risk has continued to decline and is currently 70 percent below its peak prior to publication of the ability-to-repay rules,” he adds.
The five states with the greatest year-over-year increase in defect frequency are: Arkansas (+16.7 percent), Wyoming (+13.5 percent), New Mexico (+13.0 percent), Virginia (+12.2 percent) and Maryland (+10.8 percent).
The five states with the greatest year-over-year decrease in defect frequency are: South Carolina (-13.3 percent), Louisiana (-12.9 percent), Minnesota (-10.6 percent), Alabama (-10.0 percent) and Vermont (-9.6 percent).
The Defect Index reflects estimated mortgage loan defect rates over time, by geography and loan type. It is available as an interactive tool that can be tailored to showcase trends by category, including amortization type, lien position, loan purpose, property and transaction types, and can provide state- and market-specific comparisons of mortgage loan defect levels.
