Falling Rates Drive Acceleration in Defect Risk, According to First American’s Loan Application Defect Index
—The overall rise in purchase and refinance applications, coupled with strong first-time home buyer demand and tight inventory, bodes well for an early spring home-buying season, but may contribute to further increases in defect risk, says Chief Economist
- The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 4.6 percent compared with the previous month.
- Compared to
January 2018 , the Defect Index increased by 9.6 percent. - The Defect Index is down 10.8 percent from the high point of risk in
October 2013 . - The Defect Index for refinance transactions increased by 5.1 percent compared with the previous month, and is up 20.3 percent compared with a year ago.
- The Defect Index for purchase transactions increased by 5.6 percent compared with the previous month, and is up 3.3 percent compared with a year ago.
Chief Economist Analysis: Why is Defect Risk Accelerating?
“The Loan Application Defect Index for purchase transactions continued its upward trend, increasing 5.6 percent in January compared with the month before, the fifth consecutive month defect risk in purchase transactions has risen,” said
Plunge in Rates, Spike in Mortgage Applications
“Surprisingly, mortgage rates declined in December and continued falling into January, reaching their lowest levels since
“The Defect Index has historically illustrated a distinct difference in risk between refinance and purchase loan transactions – refinance loan transactions have always been less risky than purchase transactions. The relationship has often shown that as mortgage rates rise, so does overall defect, fraud and misrepresentation risk,” said Fleming. “As mortgage rates rise, fewer people refinance, so the share of less risky refinance loan transactions decreases and the share of more risky purchase transactions increases. This dynamic played out throughout most of 2018, as rates were rising. However, the forces driving the acceleration in fraud risk over the last two months are a little less clear because the recent decline in mortgage rates prompted a surge in both purchase and refinance mortgage applications.”
Rising Demand, Competitive Market May Contribute to Increasing Fraud Risk
“The overall rise in purchase and refinance applications, coupled with strong first-time home buyer demand and tight inventory, bodes well for an early spring home-buying season, but may contribute to further increases in defect risk. Historically, purchase transactions tend to be more at risk of defects, fraud and misrepresentation, and the pressures resulting from rising demand and a strong sellers’ market compounds that risk,” said Fleming. “When home values are rising and the housing market is competitive, more buyers want to enter in the market. As a result, misrepresentation and fraud are more likely on a loan application.
“Last week, mortgage rates fell even further to 4.35 percent, their lowest level since
- The five states with the greatest year-over-year increase in defect frequency are:
West Virginia (+37.5 percent),Maine (+35.8 percent),New York (+35.5 percent),Nebraska (+33.3 percent), andAlaska (+30.7 percent). - The five states with the greatest year-over-year decrease in defect frequency are:
Vermont (-12.8 percent),Florida (-5.1 percent),Arkansas (-3.7 percent),Arizona (-3.6 percent), andOhio (-1.3 percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are:
Richmond, Va. (+33.8 percent),Pittsburgh (+29.2 percent),Buffalo, N.Y. (+26.5 percent),San Jose, Calif. (+26.5 percent), andHartford, Conn. (+25.4 percent). - Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are:
Jacksonville, Fla. (-13.3 percent),Houston (-11.5 percent),Orlando, Fla. (-7.3 percent),Tampa, Fla. (-5.3 percent), andMiami (-4.8 percent).
Next Release
The next release of the First American Loan Application Defect Index will take place the week of
Methodology
The methodology statement for the First American Loan Application Defect Index is available at http://www.firstam.com/economics/defect-index.
Disclaimer
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.
About First American
View source version on businesswire.com: https://www.businesswire.com/news/home/20190228005190/en/
Media Contact:
(714) 250-3298
Source:
Universal Health Realty Income Trust Reports 2018 Fourth Quarter and Full Year Financial Results
Healthcare Payer Services Market : Crucial Business Trends and Upcoming Enhancement Anticipations 2017-2025
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News