Mortgage Defect Risks are down, especially for purchase transactions where the defect risk decreased 4.6 percent in May compared with the previous month and was down 7.8 percent compared with a year ago, according to the First American [1] Loan Application Defect Index released on Thursday. According to the index, the defect risk for purchase transactions has declined almost 10 percent over the past five months.
The industry’s focus on enhancing mortgage technology is one of the likely reasons for the decline in the risk for purchase loan defect risks. “It’s likely that all of the investment in more digitized, automated, and efficient mortgage manufacturing and underwriting technology that’s been made in recent years is beginning to pay off,” said Mark Fleming, Chief Economist at First American.
According to Fleming, the industry was entering a market that would be dominated by purchase demand for the next several years as the share of refinance loans declined due to “the current environment of increasing mortgage rates that follows years of persistently low rates.”
Since most homeowners had already benefited from the low-rate environment, “they now have little financial incentive to refinance, or sell and buy again,” Fleming said.
The overall Loan Application Defect Index indicated that the frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications decreased by 2.4 percent in May over the previous month and by 3.6 percent when compared to May 2017. The defect index for refinance loans remained unchanged from the previous month but was 4.4 percent higher than a year ago.
Despite the obstacles of a high rate environment, Fleming said that consumers would still continue to buy. “Lifestyle decisions will still incentivize people to buy, and sometimes that beautiful kitchen is just too hard to resist,” Fleming said, explaining why the market for purchase loans was expected to grow even though mortgage rates increased.
As a result, Fleming said, “There’s no better time to have loan application misrepresentation, defect and fraud risk on purchase transactions on the decline than when the market share of purchase transactions is rising.”
Click here [2]to learn how the Loan Application Defect Index performed regionally.