—The future of fraud and misrepresentation risk is tied closely to mortgage rates, says Chief Economist
- The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 4.2 percent compared with the previous month.
- Compared to
April 2018, the Defect Index increased by 11.0 percent.
- The Defect Index is down 10.8 percent from the high point of risk in
- The Defect Index for refinance transactions decreased by 3.5 percent compared with previous month, and is up 16.9 percent compared with a year ago.
- The Defect Index for purchase transactions decreased by 4.0 percent compared with the previous month, and is up 10.3 percent compared with a year ago.
Chief Economist Analysis: Lower Mortgage Rates Help Break Defect Risk Trend
“The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications declined 4.2 percent compared to last month. Notably, this marks the first month-over-month decline since
“The two competing trends that resulted in a flat fraud risk last month were the increasing share of less risky refinance transactions working to decrease overall fraud risk, and the continuation of the hot sellers’ market, motivating buyers to misrepresent information in order to qualify for a bigger mortgage and increase overall fraud risk,” said Fleming.
“The mix of refinance and purchase activity fluctuated within the month of April. Refinance activity increased in the first half of the month as mortgage rates declined. However, lower mortgage rates also fueled an increase in purchase transactions, as buyers took advantage of their increased house-buying power,” said Fleming. “In fact, purchase applications hit their highest level in nine years towards the end of April. While loan application defects can happen on both purchase or refinance transactions, there is a higher propensity for fraud and misrepresentation with purchase transactions.
Increased Inventory Cools Misrepresentation Pressure
“However, the decline in mortgage rates had a third and even more important consequence, which was to help alleviate some of the supply constraints that made the housing market so competitive,” said Fleming. “As we saw in last month’s report, in extremely competitive markets, there is more motivation to misrepresent information on a loan application to qualify for the bigger mortgage in order to win the bidding war.
“Most recently, real estate agents indicate that their buyers are encouraged by an unexpected surge of supply. April did see an increase in total housing inventory, rising to 1.83 million from 1.67 million in March, which is a 1.7% increase year-over-year. Potential buyers feel less inclined to misrepresent information on a loan application when they don’t feel the pressure of a hot sellers’ market. Indeed, misrepresentation of income and employment both fell this month, by 1.7 percent and 3.6 percent respectively,” said Fleming.
“The future of fraud and misrepresentation risk is tied closely to mortgage rates. Increased inventory reduces competitive pressures and misrepresentation risk, alongside the rising share of lower-risk refinance transactions,” said Fleming. “It remains to be seen if mortgage rates, now flirting with 4 percent, will go any lower. If so, we may anticipate the continued downward trend in defect risk and misrepresentation, with further increases in refinance transactions and inventory, resulting in less pressure on the market.”
- The five states with a year-over-year increase in defect frequency are:
New York(+37.3 percent), Nebraska(+37.0 percent), Iowa(+35.0 percent), Hawaii(+33.7 percent), and West Virginia(+31.1 percent).
- There are two states with the year-over-year decrease in defect frequency:
Arkansas(-4.8 percent) and Florida(-1.1 percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are:
Buffalo, N.Y.(+36.9 percent), Pittsburgh(+31.3 percent), Richmond, Va.(+30.1 percent), Cincinnati(+29.3 percent), and New York(+26.3 percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with year-over-year decrease in defect frequency are:
Jacksonville, Fla.(-11.6 percent), Houston(-8.5 percent), Orlando, Fla.(-7.4 percent), San Diego(-4.3 percent), and Miami(-2.0 percent).
The next release of the First American Loan Application Defect Index will take place the week of
The methodology statement for the First American Loan Application Defect Index is available at http://www.firstam.com/economics/defect-index.
Opinions, estimates, forecasts and other views contained in this page are those of First American’s chief economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2019 by First American. Information from this page may be used with proper attribution.
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