The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications fell 1.4% in October compared with September, according to First American’s Loan Application Defect Index.
That’s down 13.9% compared with October 2018 and down 33.3% from the high point of risk in October 2013.
The rate of defects in applications for refinances decreased by 3.2% compared with September and fell by 14.1% compared with October 2018.
The rate of defects for purchase transactions was flat compared with the previous month but down 8.5% compared with a year earlier.
The overall decrease in the index follows a drop of 5.5% in September.
Mark Fleming, chief economist for First American, says the defect risk on purchase transactions is likely to continue to fall as sellers’ market conditions ease their grip on the broader housing market.
“Based on our analysis, if mortgage rates continue to fall, the pressure on fraud risk may weaken,” Fleming says in a statement. “This has played out throughout most of 2019, as the 30-year, fixed mortgage rate has been falling since December 2018, and overall fraud risk alongside it.”
As Fleming explains, there is a relationship between house-buying power and fraud risk. As consumers see their house-buying power increase, they are less inclined to submit fraudulent information on mortgage applications.
On the other hand, lack of supply can have the opposite effect.
“Potential home buyers may feel more confident and less inclined to commit fraud when they are in a better financial position to purchase a home,” Fleming says, adding that the recent decreases in mortgage rates and increasing wages are helping to boost consumers’ home buying power.
However, he adds that “in a supply-constrained market” it becomes “more difficult for potential home buyers to compete with each other, so they may feel more pressure to misrepresent information on a loan application.”
“House-buying power may decline further, but should remain strong by any recent historic standard,” Fleming adds. “Additionally, new home construction is accelerating. More new homes may weaken the squeeze on supply and reduce competition among buyers and the pressure to misrepresent information on a loan application. As sellers’ market conditions loosen their grip on the broader housing market, defect risk on purchase transactions remains likely to fall.”