Risk of Mortgage Defect, Fraud, and Misrepresentation Continues to Decline

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According to First American’s newest Loan Application Defect Index, the risk of defect, fraud, and misrepresentation in mortgage loans is dropping across the country, and some markets are seeing extremely low levels of risk.

Mortgage Trends

The overall frequency rate of fraudulence, misrepresentation, and defects within information submitted in mortgage applications decreased 1.4% from August to September, the data shows. On the whole, the Defect Index has declined 14.8% compared to September of 2015, and is down 32.3% from risk’s high point in October 2013.

The index for refinance transactions didn’t change over the last month but is 16.9% lower than a year ago. For purchase transactions, September’s index increased 1.3% over August but sits 8.0% lower than a year ago.

Technology Eliminating Mistakes

The primary cause of the decline, according to Mark Fleming, Chief Economist at First American, is the widespread implementation of technology-enabled loan manufacturing processes within the mortgage finance industry. Of all new loans produced, a growing proportion has fewer defects, benefitting consumers across the United States.

Millennials Entering the Market

Another recent development, Fleming says, is the increasing role Millennial first-time buyers are playing in the housing and mortgage finance markets. There is a transition away from lower risk refinance loans and toward riskier purchase loans. The fact that defects are nonetheless in decline is a testament to overall improvements in the loan production process.

The Defect Index displays estimated mortgage loan defect rates over time, by loan type, and by geography. It can be used to highlight trends by category, including loan purpose, amortization type, lien position, and property and transaction types. In addition, state and local market comparisons of mortgage loan defect levels can be identified.

State Highlights

Not all states have been lucky enough to see improvements in the year-over-year defect frequency rates. Here are the five states with the largest rate increase:

1. Maine (+25.5%)
2. North Dakota (+14.8 %)
3. South Dakota (+11.3 %)
4. Vermont (+10.4 %)
5. Missouri (+7.2 %)

On the other end of the spectrum, here are the five states with the largest decrease in year-over-year defect frequency rate:

1. Michigan (-26.5 %)
2. Florida (-24.2 %)
3. California (-21.0 %)
4. Oklahoma (-19.8 %)
5. Nevada (-19.7 %)

Local Market Highlights

Only one of the 50 largest Core Based Statistical Areas (CBSAs) saw a year-over-year increase in defect frequency. That was St. Louis, up 1.4%.

Among those 50 CBSAs, the five markets with the largest decrease in defect frequency compared to a year ago were:

1. Detroit (-31.8%)
2. Louisville/Jefferson, KY (-28.2%)
3. Orlando, FL (-27.8%)
4. Oklahoma City (-27.8%)
5. Dallas (-24.5%)

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