Lower-Risk Loan Apps Result From Global Uncertainty

Low mortgage rates have boosted refinancing loans, and that led to continuing lower fraud risk and loan application defects in June and are noticeably down from a year earlier, according to the First American Loan Application Defect Index, released by First American Financial Corporation on Friday.

The Defect Index dropped by 1.4 percent from May to June and by 12.2 percent from June 2015. It has fallen 5.3 percent over the last three months, and, according to Mark Fleming, chief economist at First American, shows no sign of abating.

“The index has been reaching new lows this year, continuing its long-term trend,” Fleming said.

The Defect Index for refinance transactions declined 3.2 percent month-over-month, and is 15.5 percent lower than a year ago. The index for purchase transactions declined 1.2 percent month-over-month, and is down 11.1 percent compared to a year ago.

“Since defect risk for both purchase and refinance transactions peaked in late 2013,” the report stated, “defect risk on refinance transactions continues to decline much more than defect risk for purchase transactions, declining 40 percent as compared to 23.7 percent for purchase transactions.”

Fleming credited “the impact of improvements to the systems and production standards mitigating risk throughout the lending industry” and the continued strength of refinance application activity spurred by low mortgage rates as reasons the index is on its long downward trend.

According to the Mortgage Bankers Association, refinance activity is up slightly on a year-over-year basis, and the average rate for a 30-year, fixed rate mortgage has remained near 3.6 percent.

“We expect the declining loan application defect risk trend to continue into July, as the impacts of ‘Brexit’ and global uncertainty keep rates low, triggering an increase in the volume of lower risk refinance loan applications,” said Fleming.

Michigan led states with the largest drop in defects in June, down 31.4 percent. Detroit was also the top metro for decrease, compared to last year, with defects down 36 percent. Florida, down by almost 22 percent, also boasted three of the five best metros for defect decreases since last June: Jacksonville, Miami, and Orlando. All were down more than 20 percent. In June, Delaware also saw decreases around 20 percent, while Connecticut and New York saw drops of almost 18 percent.

On the other end, Maine saw a 14 percent rise in defect frequency, while North Dakota came a close second, with a 13.6 percent increase in June. Missouri, Montana, and Alaska also saw increases. The only market with year-over-year increase in defect frequency is: St. Louis, up 10 percent.

“In the post-crisis housing finance landscape, the attention paid to the borrower’s ability-to-pay and emphasis on issuing loans that have a reasonable and sustainable mortgage payment has increased,” Fleming said. “In other words, income matters. We continue to improve our ability to accurately project a borrower’s ability-to-pay and the sustainability of a mortgage – a benefit to consumers and lenders alike.”