February saw an increase in fraud activity and defects in mortgage loan applications, according to the First American Loan Application Defect Index from First American Financial Corp., a provider of title insurance, settlement services and risk solutions for real estate transactions.
The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 4.1% from January and 1.3% from last year.
“This month, the Loan Application Defect Index surged higher as rising mortgage rates continue to put downward pressure on lower risk mortgage refinance activity,” First American Chief Economist Mark Fleming said. “The March rate increase by the Federal Open Market Committee and strong economic performance will continue to pressure rates upward.”
The index estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications. The defect index reflects estimated mortgage loan defect rates over time, by geography and by loan type.
Despite this increase, however, the index is still down 25.5% from its peak in October 2013.
The defect index for refinance transactions increased 3.4% month-over-month, but is still down 6.2% from last year. Purchase transactions also decreased from January by 2.4%, but remained up 2.4% from a year ago.
The increase in defects is also due to a shift toward adjustable-rate mortgage loans as mortgage rates rise.
“Defect, fraud and misrepresentation risk continues to respond to the shift in market composition,” Fleming said. “Rising mortgage rates continue to increase the share of higher risk purchase loan applications, but they are also incenting more borrowers to apply for ARMs.”
“The savings for the consumer can be significant, but ARM loan applications have historically had higher defect, misrepresentation and fraud risk,” he said. “The increasing popularity of adjustable rate mortgages is something to keep an eye on as the spring home-buying season warms up.”