Why FHA-Loan-Application Defect and Fraud Risk is Decreasing

Fleming: “The big decline in this risk type is probably due to the significant risk associated with non-compliance and defective mortgage documents that are unique to the FHA program.”

IRVINE, CA—The big decline in FHA-loan defect and fraud risk is probably due to the significant risk associated with non-compliance and defective mortgage documents that are unique to the FHA program, First American Financial Corp.’s chief economist Mark Fleming tells GlobeSt.com. A recent report from the firm reveals that the company’s defect index continues to hover at a low point, but FHA loan demand is a surprising contributing factor. In the report, Fleming says, “While FHA loans are generally considered to have higher credit risk than conventional loans, according to the Defect Index, conventional loan risk is down 14.6% over a year ago, compared with a year-over-year decline of 17.7% for transactions involving FHA/VA/USDA loans. In addition, transactions involving FHA/VA/USDA loans are currently 14.5% less risky than transactions involving conventional loans. In fact, loan application and defect risk on transactions involving FHA/VA/USDA loans has declined more in recent years than the defect risk for conventional mortgages.”

We spoke exclusively with Fleming about why the loan-application default and fraud risk of FHA loans has been decreasing and where he sees this trend heading.