Mortgage Loan Application Defects: Where Are They Most Prevalent?

By | January 2, 2018

Source: First American

After the financial crisis that was in no small part brought on through mortgage products such as ‘liar loans*’, lending institutions have become much more conservative!

Some of this conservatism was mandated through imposed federal government regulation such as Dodd-Frank while some was through the publics distaste for these types of loans. But lending institutions now have no appetite for consumer fraud and misinformation provided on mortgage loan applications.

Enter the First American Loan Application Defect Index that ‘estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard® system.’ So while this is not an industry wide indicator, it may provide some useful anecdotal evidence concerning the stability of the mortgage marketplace.

And while there has been a decline in the Index with 2016 seeing its lowest point since it began in 2011, with the advent of some riskier loan products the numbers have begun to creep-up.

Findings Of The November 2017 Loan Application Defect Index

The First American Loan Application Defect Index showed that in November 2017:

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same compared with the previous month.
  • Compared to November 2016, the Defect Index increased by 22.1 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions remained unchanged compared with the previous month, and is 23.2 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent month over month, and is up 13.8 percent compared with a year ago.

“As 2017 ends and we look forward to 2018, there is reason to be optimistic about defect, fraud and misrepresentation risk. After a year of significant change, defect risk has stabilized, with no change in the overall level of defect risk in three of the last four months,” said Mark Fleming, chief economist at First American. “Keep in mind that the Loan Application Defect Index was at its lowest point ever in November 2016, before defect risk surged by 24 percent in the following seven months, one of the fastest changes the defect index has recorded since its inception in 2011. The increase was primarily driven by an increase in the share of purchase mortgage transactions, which tend to carry more risk, and more transactions in riskier markets. This fall, we have seen some moderation and stabilization of these market dynamics and, as a result, no further increase.”

You can read all the findings and watch a short video about loan defects at the First American website here.

*Liar Loans: Mortgage applicants basically filled-out applications where the information provided was not rigorously verified or potentially not verified at all.

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