Mortgage risk increases come to a halt after 7 months

Default and fraud risk still up 20% from last year

Defects, fraudulence and misrepresentation halted its upward trend during July for the first time after seven months of increases, according to the latest Loan Application Defect Index for July 2017 from First American Financial Corp., a global provider of title insurance, settlement services and risk solutions for real estate transactions.

 First American’s 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.

The frequency of defects, fraud and misrepresentation in the information submitted in mortgage applications remained steady in July compared to the previous month. However, this is still up 20% from last year.

“Finally, after seven consecutive months of increasing defect, fraud, and misrepresentation risk, no change compared to last month is welcome news,” First American Chief Economist Mark Fleming said. “In particular, purchase transactions, which are inherently more at risk of defects, fraud and misrepresentation, showed no increase compared to a month ago.”

“One month doesn’t establish a trend, so it will be important to see if we’ve reached a turning point in the long-run trend of increasing defect risk,” Fleming said.

But despite the increase risk from last year, it remains 17.6% below the peak in October 2013.

While the Defect Index increased 1.4% monthly for refinance transactions, it is up a full 20.3% from last year. The index for purchase transactions remained the same from last month, and is up 15.2% from last year.

“In September, the Federal Open Market Committee may act again to push interest rates higher,” Fleming said. “Historically, when mortgage rates increase, more borrowers consider adjustable-rate mortgages with lower rates instead of more traditional fixed-rate mortgages to maintain purchasing power.”

“An adjustable-rate mortgage can be a good alternative to a fixed-rate mortgage in a rising rate environment, but they have historically had more fraud and misrepresentation risk,” he said. “Yet, this year the risk gap has closed. Rates may rise and adjustable-rate mortgages may be more attractive, but the Fed’s actions won’t impact loan defect risk.”

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