The rate of defects in mortgage applications continued to decrease in August, due mostly to the fact that applications for refinances made up a greater share of overall application volume.
Applications for refinances generally carry lower fraud risk, compared with applications for purchases, because the borrower information has, in most cases, have previously been verified.
The decrease in the rate of defects resulted in a score of 60 on First American’s Loan Application Defect Index.
The rate of defects in all applications fell by 1.6% relative to July and was down 17.8% compared with August 2019.
“The monthly decline was driven by both purchase and refinance loan fraud risk,” says Odeta Kushi, deputy chief economist for First American. “While refinance loan fraud risk continued its three-month descent, this marked the first time in five months that purchase loan fraud risk declined. Yet, purchase fraud risk remains 5.2 percent higher than one year ago.”
The rate of defects in applications for refinances decreased by nearly 26% compared with one year ago and reached a new low in its almost 10-year history.
“Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, but it’s likely that the mortgage finance industry’s significant investment and adoption of financial technology has contributed to the decline in refinance fraud risk,” Kushi says.
The rate of defects for applications for purchases fell 2.4% compared with July but was up 5.2% compared with August 2019.
Another major factor that has been driving lower defect rates is technology.
“As consumers rush to lock in historically low rates, financial technology and automation not only saves time, but reduces fraud,” Kushi adds. “Technology allows lenders to compare a borrower’s information against employment databases and can be used to flag missing or inconsistent data. These advancements, which help to deliver a convenient, digital, highly automated experience, have also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk.”