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

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.

GlobeSt.com:  What factors are contributing to loan-application defect and fraud risk involving FHA loans being less risky than those involving conventional loans?

Fleming: To be clear, the default risk of FHA loans is still higher than the default risk for conventional loans, but the loan application defect and fraud risk is lower. 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.

GlobeSt.com: What factors have made the default risk for conventional loans higher?

Fleming: Typically, the default risk is higher for conventional loans because they are designed to be made available to borrowers with lower credit scores and less money down.

GlobeSt.com: Do you anticipate loan-application defect and fraud risk in transactions involving FHA loans to continue to decrease?

Fleming: Not indefinitely. While improvements have been made, I don't think the reasonable expectation should be defect and fraud risk free, but to achieve a reasonable balance based on the costs of managing and mitigating defect and fraud risk.

GlobeSt.com: What else should our readers know about transactions involving FHA loans?

Fleming: It's good news for consumers that the process of originating FHA loans is improving in the management of defect and fraud risk. The ability to measure and show the decline in this risk substantiates the value of FHA loan products and the role they play in making mortgage credit widely accessible.

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.

GlobeSt.com:  What factors are contributing to loan-application defect and fraud risk involving FHA loans being less risky than those involving conventional loans?

Fleming: To be clear, the default risk of FHA loans is still higher than the default risk for conventional loans, but the loan application defect and fraud risk is lower. 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.

GlobeSt.com: What factors have made the default risk for conventional loans higher?

Fleming: Typically, the default risk is higher for conventional loans because they are designed to be made available to borrowers with lower credit scores and less money down.

GlobeSt.com: Do you anticipate loan-application defect and fraud risk in transactions involving FHA loans to continue to decrease?

Fleming: Not indefinitely. While improvements have been made, I don't think the reasonable expectation should be defect and fraud risk free, but to achieve a reasonable balance based on the costs of managing and mitigating defect and fraud risk.

GlobeSt.com: What else should our readers know about transactions involving FHA loans?

Fleming: It's good news for consumers that the process of originating FHA loans is improving in the management of defect and fraud risk. The ability to measure and show the decline in this risk substantiates the value of FHA loan products and the role they play in making mortgage credit widely accessible.