The frequency of defects in mortgage applications increased by 4.6% in January compared with December and was up 9.6% compared with January 2018, according to First American’s Loan Application Defect Index.
The main factor driving the increase was the ongoing shift to a purchase market. Application defects – including fraudulence and misrepresentations – tend to be more prevalent in purchase applications because, unlike refinances, borrower information is being submitted and verified for the first time.
“Historically, purchase transactions tend to be more at risk of defects, fraud and misrepresentation, and the pressures resulting from rising demand and a strong sellers’ market compounds that risk,” says Mark Fleming, chief economist for First American, in a statement. “When home values are rising and the housing market is competitive, more buyers want to enter in the market. As a result, misrepresentation and fraud are more likely on a loan application.”
Falling mortgage rates also helped drive the increase.
“Last week, mortgage rates fell even further to 4.35 percent, their lowest level since February 2018,” Fleming says.
This drop in rates resulted in a “mini boom” in both refinance and purchase volume, which, in turn, boosted the overall defect rate.
“As home buyers continue to take advantage of this lower rate environment amid a very competitive market, we can expect fraud risk will continue to trend higher,” he says.
Although the rate of defects increased month-over-month and year-over-year, it was still down 10.8% from the high point of risk in October 2013.
Defects in refinance transactions increased 5.1% compared with December and were up 20.3% compared with January 2018.
Defects in purchase transactions increased 5.6% compared with the previous month and were up 3.3% compared with a year earlier.
It was the fifth consecutive month that the rate of defects in purchase transactions increased.