Loan Defect Levels Up Slightly

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 1.5 percent in December as compared with November, according to the latest Loan Application Defect Index released by First American Financial Corporation. Compared to December 2015, however, the Defect Index decreased by 9.2 percent.

The Defect Index for refinance transactions increased 1.8 percent month-over-month, but it is 13.6 percent lower than a year ago. The Defect Index for purchase transactions increased 1.3 percent compared to last month, and it is 3.6 percent lower when compared to a year ago.

The five states with the highest year-over-year increase in defect frequency are Montana (25.8 percent), Wyoming (25 percent), Maine (24 percent), North Dakota (21.3 percent) and South Dakota (20 percent). The five states with the highest year-over-year decrease in defect frequency are: Michigan (-17.6 percent), California (-17.3 percent), Rhode Island (17.1 percent), Maryland (-13.3 percent) and Oklahoma (-13.2 percent). Raleigh, N.C., and St. Louis tied as the metro areas with the greatest year-over-year increase in defect frequency, each recording a 11.6 percent increase.

“Defect, fraud and misrepresentation risk dispersion, while increasing modestly month-over-month, remains well below the peak in 2011,” said Mark Fleming, chief economist at First American. “In particular, we have seen marked reductions over time in the number of markets with highly elevated risk and the magnitude of risk in those markets,” said Fleming. “Risk is always relative. Even the highest risk markets today are well below the risk levels of many markets in 2011.”