Report: Refi Boom, Improved Loan Processes Keeping Loan Defect Rate Low

September 8, 2016

Refinance activity, fueled by historically low mortgage rates, combined with improved loan manufacturing processes are producing the lowest level of loan defects and misrepresentation that we have seen in recent history, according to the latest First American Loan Application Defect.

The report estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications. The index reflects estimated mortgage loan defect rates over time, by geography and by loan type.

According to First American, the defect index decreased 2.8 percent in July as compared with June and decreased 16.7 percent as compared with July 2015. The Defect Index is down 31.4 percent from the high point of risk in October 2013.

“The Defect Index continues to improve as the share of refinance activity in the market remains strong. According to the latest MBA mortgage applications survey, the refinance share of mortgage applications remains above 60 percent. The housing market continues to benefit from historically low mortgage rates, which are driving lower defect-risk refinance activity,” said Mark Fleming, chief economist at First American. “The average rate for a 30-year, fixed-rate mortgage fell in July to 3.44 percent from 3.57 percent in June. Other than between October 2012 and January 2013, this marks the lowest mortgage rates have been since Freddie Mac began tracking mortgage rates in 1971. To the extent that lower defect-risk refinance applications continue to occupy a large share of the mortgage market, the overall index will benefit.”

The defect index for refinance transactions declined 1.7 percent month-over-month, and is 18.1 percent lower than a year ago. The Defect Index for purchase transactions declined 1.3 percent month-over-month, and is down 13.2 percent compared to a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions continues to decline much more than defect risk for purchase transactions, declining 41.0 percent as compared to 24.0 percent for purchase transactions.

“The benefits in compliant loan production processes are becoming more clearly evident, particularly for refinance transactions, in the big declines we are observing in loan application and mortgage defect risk,” said Fleming. “Refinance activity, fueled by historically low mortgage rates, combined with improved loan manufacturing processes are resulting in higher quality loan applications with the lowest level of defects and misrepresentation that we have seen in recent history.”

July 2016 State Highlights

The four states with the highest year-over-year increase in defect frequency are:

  • Maine (+16.7 percent)
  • North Dakota (+11.9 percent)
  • Missouri (+5.6 percent)
  • Montana (+2.6 percent)

The five states with the highest year-over-year decrease in defect frequency are:

  • Michigan (-33.0 percent)
  • Florida (-24.5 percent)
  • New Mexico (-21.0 percent)
  • Connecticut (-20.9 percent)
  • New Hampshire (-20.3 percent)

July 2016 Local Market Highlights

Among the largest 50 Core Based Statistical Areas (CBSAs), the only market with a year-over-year increase in defect frequency is: St. Louis (+4.1 percent).

Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are:

  • Detroit (-37.0 percent)
  • Louisville/Jefferson, Ky. (-27.4 percent)
  • Buffalo, N.Y. (-26.6 percent)
  • Orlando, Fla. (-25.8 percent)
  • Jacksonville, Fla. (-25.3 percent)

The Charms of Southern Living Elevate Risk

This month, South Carolina has emerged and caught Fleming’s attention.

“Monitoring the mortgage market for loan application defect and, particularly, misrepresentation risk is always a challenge as ‘hot spots’ can emerge very quickly,” Fleming said. “South Carolina is currently the second-highest risk state in the nation and, among the 100 largest CBSAs, hosts three of the top five riskiest markets—Columbia, Charleston and Greenville.

“South Carolina, like much of the South, is benefiting from increased demand for real estate of all types, as people are attracted by the relatively low cost of housing compared to markets in the West or Northeast. The charms of southern living may be elevating loan application defect and misrepresentation risk. In particular, as we saw in the housing boom, misrepresentation risk tends to rise in hot markets,” Fleming added.


Contact ALTA at 202-296-3671 or communications@alta.org.

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