Something happened in March that slowed the defect risk trend

A measure of the risk of defects, fraud, and misrepresentations in mortgage applications recorded a change in March.

First American Financial’s Loan Application Defect Index was unchanged month-over-month in March, snapping a trend of surging risk in the first two months of 2019 which saw the index reach its highest point since 2013. The index was up 15.9% year-over-year.

But what has changed that put a hold on the month-over-month trend?

“Two recent trends influenced defect risk in opposite directions and drove the moderation in defect risk,” said First American’s chief economist Mark Fleming. “Sellers’ market conditions increased fraud risk, but the rising share of lower-risk refinance transactions reduced fraud risk.”

How refinances, purchases compare
The index for refinance transactions remained the same compared with previous month and is up 22.9% compared with a year ago.

“While loan application defects can happen on either purchase or refinance transactions, there is a lower propensity for fraud and misrepresentation with refinance transactions,” said Fleming. “So, as the share of lower-risk refinance transactions increases, overall fraud risk tends to decline.”

The index for purchase transactions increased by 1% compared with the previous month and is up 12.4% compared with a year ago.

“In the first quarter of 2019, declining mortgage rates, ongoing household income growth and moderating unadjusted home prices boosted affordability,” said Fleming. “Yet, the increased demand for housing is occurring in a supply-constrained market, resulting in another sellers’ market this spring. In these competitive conditions, there is more motivation to misrepresent information on a loan application to qualify for the bigger mortgage necessary to win the bidding war for a home. In fact,

employment misrepresentation increased 2.9% compared with the previous month.”

The five states with a year-over-year increase in defect frequency are: Nebraska (+41.9%), New York (+41.3%), Iowa (+39.5%), West Virginia (+37.8%), and Maine (+36.2%).

Arkansas (-0.9 percent) was the only state to show a decrease.