5 States Plaugued With Mortgage Loan Defects

Mortgage loan defects, which includes fraudulence and misrepresentation in loan applications, still trouble some areas in the U.S.

Although loan defects are back to their normal disappearing act on a national basis, some states are still fighting to get their defect numbers down, according to First American's Loan Application Defect Index for April 2016.

The index decreased 1.3 percent in April as compared with March and decreased by 5.1 percent as compared with April 2015. Loan defects are now down 26.5 percent from the high point of risk in October 2013.

In March, First American reported that loan defects were beginning to reappear in the market due to heightened risk from government loans. At this time, the index rose 1.3 percent but was 2.6 percent lower than a year ago. The index rose in March for the first time since July 2015, ending seven consecutive months of declining defect and misrepresentation risk, but was down 25.5 percent from the high point of risk in October 2013.

“April’s decline in defect risk was proof that the modest increase observed in March was not the beginning of an upward trend in defect risk. The index is again at the lowest point since its inception,” said Mark Fleming, Chief Economist at First American.

He continued, “Since the peak in late 2013, defect misrepresentation and fraud risk has trended significantly lower. While loan production expenses have increased during this time period, the decline in defect risk is reflective of the adoption and investment in better and more compliant loan manufacturing procedures."

According to First American, the index for refinance transactions fell 3.0 percent month-over-month, and is 7.2 percent lower than a year ago. Meanwhile, purchase transaction defects declined 1.2 percent month-over-month, and are down 5.7 percent compared to a year ago.

“It’s important to note that misrepresentation and fraud risk is consistently higher on purchase transactions than refinance transactions. We expect, as mortgage rates increase, the share of refinance transactions will decline," Fleming said. “So, it is possible that the overall Defect Index could indicate an increase in risk because of a change in the relative mix of low risk refinance transactions to higher risk purchase transactions."

“The mortgage industry continues to benefit from its adoption of technology and investments to improve the loan manufacturing process. Defect and misrepresentation risk is at historically measured lows. Yet, we should be wary that future increases in the overall index may not represent a true reversal of this benefit, but rather a reflection of the decline in volume of lower risk refinance transactions relative to higher risk purchase transactions," he concluded.

First American's Top 5 States With the Highest Year-Over-Year Increase in Defect Frequency:

1. North Dakota (+27.8 percent)
2. Missouri (+14.7 percent)
3. Utah (+12.5 percent)
4. Kentucky (+10.9 percent)
5. Oklahoma (+9.6 percent)

First American's Bottom 5 States With the Highest Year-Over-Year Decrease in Defect Frequency:

1. Michigan (-20.4 percent)
2. West Virginia (-17.4 percent)
3. New Mexico (-13.0 percent)
4. Florida (-12.5 percent)
5. Alabama (-11.8 percent)