Lower rates, stronger homebuying power continue to bring down loan application defects

by Candyd Mendoza02 Dec 2019

The risk and frequency of loan application defects, fraudulence, and misinterpretations in mortgage applications has continued to slide.

The First American Loan Application Defect Index was 1.4% lower in October than in September. The index also plunged 13.9% year over year.

First American Chief Economist Mark Fleming said that low mortgages rates might have caused the pressure on fraud risk to weaken.

“This has played out throughout most of 2019, as the 30-year fixed mortgage rate has been falling since December 2018, and overall fraud risk alongside it,” Fleming said. “Fraud risk began declining in March 2019 and reached a historical low in October.”

The Defect Index for refinance transactions has followed a similar trend, falling 14.1% from a year ago and decreasing 3.2% from September. Meanwhile, the risk for purchase applications remained unchanged from the previous month but was down 8.5% compared to last year.

The declines in loan application defects can be partly attributed to rising household income and increased consumer house-buying power, Fleming said.

House-buying power hit a peak of $421,120 in September but inched down 0.8% in October when mortgage rates climbed month over month for the first time since November 2018, according to First American.

“Potential homebuyers may feel more confident and less inclined to commit fraud when they are in a better financial position to purchase a home,” said Fleming. “In a supply-constrained market, a decline in house-buying power makes it more difficult for potential home buyers to compete with each other, so they may feel more pressure to misrepresent information on a loan application.”