Mortgage Loan Defects on the Rise

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 4.1 percent from January to February, according to the latest Loan Application Defect Index data from First American Financial Corporation. On a year-over-year measurement, the Defect Index increased by 1.3 percent from February 2016.

 

The Defect Index for refinance transactions increased 3.4 percent month-over-month from January to February, although it is 6.2 percent lower than a year ago. The Defect Index for purchase transactions increased 2.4 percent from January to February and is 2.4 percent higher on a year-over-year basis.

 

“This month, the Loan Application Defect Index surged higher as rising mortgage rates continue to put downward pressure on lower risk mortgage refinance activity,” said Mark Fleming, chief economist at First American, who warned that the situation can potential grow more problematic. “The increasing popularity of adjustable rate mortgages is something to keep an eye on as the spring home buying season warms up. As the spring home buying season gets underway in earnest, the volume of higher risk purchase applications will grow and further increase loan application defect and fraud risk. The increased share of higher risk purchase transactions and the potential for more adjustable rate mortgages amid the expected strong spring market means mortgage lenders should remain watchful for defect and fraud risk.”