"The defect ratio has increased nationally perhaps due in large part to the volume of applications, especially in the regions of noted increase,” says Sam Ally, vice-president of business development for HIS Capital Group. “A ‘boon’ of activity in primary, secondary and now tertiary markets has amplified the recent rash of issues.”
According to July’s Loan Application Defect Index, defects rose 4.9% from June to July – and while defects were down 5.6% from the same time last year, the frequency of overall application defects is on the rise.
According to a report from First American Financial, those 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%).
Those with the highest rate of defects are Michigan, Florida, Texas, Oklahoma and Hawaii.
The Defect Index moves higher as greater numbers of defect indicators are identified, with an increase in the index indicating a rising level of loan application defects – an increase that can be attributed to a lack of fail safes being in place.
“This influx in activity simply highlights the fact that as an industry we have yet to implement the necessary fail safes to mitigate the defects,” says Ally. “For us it is a daily focus, we take a proactive approach to staff training, quality control, and lending fundamentals to mitigate risk for our borrowers and investors alike.”
The frequency of loan application defects had shown a consistent downward trend since the peak in 2013; that is, until the beginning of this year.
Defects in fixed-rate mortgages showed a significant surge, rising 8.4% in July from the previous month, and 9.6% over the last three months.
There’s growing concern about a spike in application defects, with increased worry about specific regions and their overall impact.