Mortgage Application Defect Risk Increasing As Refinance Volume Drops

The risk of defects in applications for mortgages increased 5.8% in January compared with December and increased 3.9% compared with January 2016, according to First American Financial Corp.’s Loan Application Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type.

First American points out that the index is down 28.4% compared with the high point of risk in October 2013.

The defect index for refinance transactions increased 3.5% in January compared with December but decreased 9.2% compared with January 2016.

The defect index for purchase transactions increased 2.5% compared with the previous month but decreased 1.2% compared with a year earlier.

Mark Fleming, chief economist at First American, says the increase is “largely the result of waning refinance activity in the mortgage market.”

“Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the increased risk of misrepresentation and fraud is due to the increasing share of higher-risk purchase transactions within the mortgage market,” Fleming says in a statement.

“As the mortgage market composition continues to shift toward purchase transactions in 2017, the risk of defect, fraud and misrepresentation will also increase,” he adds. “In real estate, location matters. In defect, misrepresentation and fraud risk, loan purpose matters.”

The Mortgage Bankers Association reported at the end of January that the share of refinance applications fell below 50% for the first time since July 2015.

“The last time the Loan Application Defect Index experienced a significant increase was also in mid-2015 in response to the decreasing share of refinance transactions in the market at the time,” Fleming says.


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