First American’s Loan Application Defect Index for December 2019, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, shows that although overall fraud risk declined month to month (-1.5%), the pace of decline was slower than earlier in the year.
Compared to November 2018, the Defect Index decreased by 16%, while the index is down 34.3% from the high point of risk, in October 2013.
The Defect Index for refinance transactions decreased by 3.3% in December compared with November and decreased by 26.6% compared with a year ago. The index for purchase transactions increased by 1.3% compared with the previous month and is down 13.3% compared with a year ago.
“For the majority of 2019, overall fraud risk steadily declined, largely due to the rising volume of lower risk refinance transactions driven by low mortgage rates,” explains Mark Fleming, chief economist at First American. “After falling since March, overall defect risk stabilized in November, and then declined again in December.”
The five states with the greatest year-over-year decrease in defect frequency are West Virginia (-42.7 percent), Alaska (-35.1 percent), North Carolina (-31.9 percent), Virginia (-31.5 percent), and Indiana (-35.1 percent).
Among the largest 50 Core Based Statistical Areas (CBSAs), there is no market with a year-over-year increase in defect frequency. The five markets with the greatest year-over-year decrease in defect frequency are Virginia Beach, Va. (-35.6 percent), Richmond, Va. (-35.3 percent), San Diego (-31.6 percent), Raleigh, N.C. (-31.1 percent), and Birmingham, Ala. (-29.9 percent).
“While declining fraud risk is the new norm, should market composition shift back toward a greater share of higher risk purchase transactions, or the sellers’ market strengthens even further, we can expect an even slower pace of decline, or even a return to rising fraud risk,” Fleming notes.
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, and property and transaction types, and can provide state- and market-specific comparisons of mortgage loan defect levels. More information can be found here.