The rate of defects found on mortgage loan applications is on the rise, according to a new report from First American Financial (FAF).
First American’s Loan Application Defect Index for July found that loan application defects rose 4.9% from June to July, rising to the second highest total of the year.
July’s Loan Application Defect Index showed that loan application defects are down 5.6% from the same time last year, but overall, the frequency of loan application defects is on the rise in 2015.
According to First American’s report, the frequency of loan application defects improved from May to June, but reversed that in July, falling in line with the yearly trend, which has seen the Defect Index rise 10.4% in 2015.
The Loan Application Defect Index estimates the frequency of defects in the information submitted in mortgage loan applications and reflects estimated mortgage loan defect rates over time, by geography and by loan type.
The Loan Application Defect Index estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard system.
The index is based on the frequency with which defect indicators are identified. The Defect Index moves higher as greater numbers of defect indicators are identified. An increase in the index indicates a rising level of loan application defects.
The frequency of loan application defects had shown a consistent downward trend since the peak in 2013 until the beginning of 2015.
"After seeing improvement in the national mortgage loan defect trend last month, the index has returned to the trend of increasing risk that we have observed since the beginning of 2015,” said Mark Fleming, chief economist at First American.
“What remains consistent from last month is the concentration of defect risk in the same handful of key markets in the south, particularly in Florida and Texas, as well as in the Northeast and upper Midwest,” Fleming said. “This month, major metropolitan areas in Florida and Texas continue to produce defect frequency levels well above the current national level.”
According to First American’s report, fixed-rate mortgage defect risk surged in July with an 8.4% increase from last month and a 9.6% increase over the last three months.
The Defect Index for refinance transactions, while still 6.3% lower than a year ago, has increased more dramatically in recent months, with estimated defect incidence up 8.7% month-over-month and 7.1% over the last three months.
On a state-by-state basis, the five states with the highest month-over-month increase in defect frequency are: Oklahoma (up 14%), Hawaii (up 13.1%), Louisiana (up 10%), Texas (up 10%) and Colorado (up 9.3%).
The five states with the highest rate of defects are Michigan, Florida, Texas, Oklahoma and Hawaii.
The five states with the highest month-over-month decrease in defect frequency are: Iowa (down 11.4%), Massachusetts (down 5.4%), Alaska (down 5.3%), the District of Columbia (down 4.7%) and West Virginia (down 3.1%).
The five markets with the highest quarter-over-quarter increase in defect frequency are: Oklahoma City, Okla. (up 28.2%); Houston (up 25.6%); McAllen, Texas (up 25.0%); Austin, Texas (up 21.3%) and Louisville, Ky. (up 19.7%).
The five markets with the highest quarter-over-quarter decrease in defect frequency are: Rochester, N.Y. (down 28.6%); Wichita, Kan. (down 12%); Richmond, Va. (down 9.5%); Dayton, Ohio (down 8.1%) and Springfield, Mass. (down 6.9%).