Loan-Application Defects Trending Down

SANTA ANA, CA—The number of defects in information submitted in mortgage-loan applications decreased 5.8% in June as compared with May and decreased 11% from a year ago, according to First American Financial Corp.'s loan-application defect index. The index is available as an interactive tool that can be tailored to showcase trends by category, including amortization type, lien position, loan purpose, property and transaction types and state- and market-level comparisons of levels of mortgage-loan defects.

Mark Fleming, chief economist for First American, tells GlobeSt.com, “The monthly and annual decline in defect incidence, as shown by First American's loan-application defect index, is indicative of declining fraud risk nationally, as well as less-intentional or unintentional misrepresentation on loan applications. Improving loan-application quality reduces risk in mortgage finance institutions.”

The defect index is down 21.4% from the high point of risk in September 2013. It has improved month-over-month, according to First American, but has shown a pronounced increase year-to-date of 5.2%. The frequency of loan-application defects had shown a consistent downward trend since the peak in 2013 until the beginning of this year. Refinance transactions have shown some of the biggest improvements, with estimated defect incidence down 5.5% month-over-month and 14.8% over a year ago. Adjustable-rate mortgages, a loan type with a consistently higher level of application defects, are also showing significant recent improvement with a 3.6% decline from last month and a 13.1% decline year-over-year, the firm reports.

“It's reassuring to see the national mortgage-loan defect trend, which had been increasing since the beginning of 2015, now partially reversing,” says Fleming. “However, the geographic distribution of defect frequency continues to concentrate in key markets in the south, particularly in Florida and Texas, as well as in the Northeast and upper Midwest. Most major metropolitan areas in Florida and Texas have defect-frequency levels above the current national level.”

According to First American, over the past year, the loan-application defect index for Houston rose 5.3%. Only two markets (Austin and Detroit) have increased more in the last year. Houston and other US energy-related markets in Texas and the Dakotas deserve watching in the coming months as fluctuations in global energy markets create stressful local economic conditions.

“This month, we focus on Houston because of the regularly cited concern that it is susceptible to the stress of low global oil prices,” says Fleming. “In fact, the recent announcement of a nuclear agreement with Iran caused oil prices to fall and raised concerns for US shale production. Desperate times call for desperate measures, and to the extent that economic stress is impacting some households in Houston, the defect index is reflecting this stress.”