Risk Of Mortgage Application Defects Rises For First Time Since July 2015

The risk of fraud and/or “defects” in mortgage loan applications increased 1.3% in March compared with February but decreased 2.6% compared with March 2015, according to First American Financial Corp.‘s Loan Application Defect Index.

It was the first time the index increased on a month-over-month basis since July 2015.

Despite this, the risk of fraud was 5.7% lower compared with a year earlier.

Texas, Florida, Oklahoma and South Carolina had a higher fraud and/or defect risk in March, according to the report.

States that saw the biggest year-over-year increases in defect risk in March included North Dakota (+19.6%), Kentucky (+15.9%), Utah (+14.1%), Missouri (+13.4%) and the District of Columbia (+9.2%).

“While February 2016 is now the new low point for the index, it’s too early to know if the increase in misrepresentation and fraud risk in March is the beginning of a long-term upward trend or a short-term adjustment,” says Mark Fleming, chief economist at First American, in a release. “One possibility for the reversal of direction is the month-over-month increase in risk among Federal Housing Administration (FHA), Veterans Administration and U.S. Department of Agriculture loans. The defect risk for these loan transaction types increased 1.4 percent from February to March, as opposed to conventional loans that had no change month over month. The share of FHA mortgage originations increased after a reduction in the premium last year, making them relatively more competitive for borrowers with low down payments and low credit scores, which also typically have higher defect risk.”

As per the index, the risk of fraud or defects in refinance transactions increased 1.5% month over month in March compared with February but remains 5.7% lower than a year ago.

The risk of fraud or defects for purchase transactions increased 1.2% month over month but remains down 3.4% compared with a year ago.

“While loan application and mortgage risk increased modestly this month, risk remains significantly lower than a year ago and is significantly lower than it’s been in the last five years,” Fleming adds. “Improved loan manufacturing compliance, underwriting consistency and risk management are finally paying off for the industry with less defect, misrepresentation and fraud risk.”

To access the full report, click here.


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