The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage applications was flat in November compared with October but was down 16% compared with November 2018, according to the First American Loan Application Defect Index.
Compared with the high point of risk in October 2013, the Defect Index was down 33.3%.
A higher share of refinances driven by low mortgage rates has been the main factor helping to hold down the overall rate of defects. Refinances generally tend to have fewer defects in the application stage because borrower information has been previously submitted and verified. Thus, as the share of refinances increases, the rate of defects in applications tends to fall.
Although the overall rate of defects was flat in November compared with the previous month, the rate of defects in applications for purchases increased slightly, month over month.
The rate of defects for applications for purchases increased by 2.7% compared with October. However, the rate of defects for purchases was down 8.3% compared with November 2018.
The rate of defects in applications for refinances decreased by 1.6% compared with previous month and was down 17.8% compared with a year earlier.
“As we predicted last month, the Loan Application Defect Index for purchase transactions reached a turning point in November,” says Mark Fleming, chief economist at First American, in the report. “After falling since March, the Defect Index for purchase transactions increased 2.7 percent compared with October, while the Defect Index for refinance transactions fell by 1.6 percent – its eighth straight month of declining risk.”
Another factor that helped drive down the overall rate of defects was increased affordability. Because mortgage rates are near historical lows, the job market is booming and family incomes are rising, consumers have greater purchase power than they have in the past. This typically results in less fraudulence in mortgage applications, as buyers are less inclined to misrepresent things like income and assets.
“Potential home buyers feel more confident and less inclined to commit fraud when they are in a better financial position to purchase a home,” Fleming says.
However, this factor can be offset by lack of supply. Because there are fewer homes available for sale, buyers may, in some cases, be more inclined to misrepresent their income and assets in order to buy a larger or more expensive home, in the event there are fewer homes available in their price range.
“When house-buying power – i.e. how much home one can buy based on changes in household income and interest rates – falls in a supply-constrained market, fraud risk may increase,” Fleming adds. “While house-buying power remains high, the pace of growth slowed beginning in October, when mortgage rates began to inch up.”