Fewer Loan Defects Reported in October

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, decreased 1.4 percent in October as compared with September, according to the latest First American Loan Application Defect Index. On a year-over-year basis, the index is down by 13.9 percent.

The Defect Index for refinance transactions dropped by 1.7 percent month-over-month and 15.9 percent year-over-year, while the index for purchase transactions was unchanged from September and down 5.9 percent from October 2015.

The five states with the highest year-over-year increase in defect frequency last month were Maine (30.6 percent), South Dakota (19.6 percent), Vermont (15.1 percent), North Dakota (11.1 percent) and Wyoming (11.1 percent). At the other end of the spectrum, the five states with the highest year-over-year decrease in defect frequency were Michigan (-21.7 percent), Florida (-19.8 percent), California (-19.5 percent), Oklahoma (-17.0 percent), and Rhode Island (-16.7 percent). Among the 50 largest metro areas, the only one market with year-over-year increase in defect frequency was St. Louis (4.2 percent).

“The post-election sudden increase in mortgage rates has accelerated the shift away from a refinance-driven market toward a purchase-dominated market,” said Mark Fleming, chief economist at First American. “Based on analysis of loan application defect risk trends, purchase loans are riskier, so I expect that the overall decline in loan application and defect risk will slow as rates continue to rise into 2017 and the share of higher risk purchase loans increases.”