Following seven straight months of declining defect risk, the Loan Application Defect Index for purchase transactions remained the same in August compared with the month before. Year over year, the Defect Index for purchase transactions decreased 13.2 percent as compared to August 2017. The Defect Index for refinance transactions is the same as the previous month and is 1.4 percent lower than a year ago.
The Loan Application Defect Index for purchase transactions continued its downward trend, declining 1.3 percent in July compared with the month before, the seventh consecutive month defect risk in purchase transactions have fallen. Yet, is declining loan application misrepresentation, defect and fraud risk isolated to a few markets or is the trend more geographically broad based?
As the mortgage market has continued its transition away from refinances to a predominantly purchase-oriented loan market, the Loan Application Defect Index for purchase transactions has continued to decline, dropping 3.6 percent in the last month and 12.1 percent in the last year. This officially marks a six-month long decline in defect, fraud and misrepresentation and risk on purchase transactions, which have traditionally been considered higher risk.
By now, everyone in the mortgage industry is aware that we are entering a market that will be dominated by purchase demand for the next several years. According to the latest Mortgage Bankers Association forecast, refinance transactions will make up 28 percent of total mortgages originated in 2018 and is forecasted to drop to 23 percent by 2020. This is, of course, due to the current environment of increasing mortgage rates that follows years of persistently low rates. Until last month, the average rate for a 30-year fixed mortgage had remained below 4.5 percent for 80 consecutive months. And since most homeowners have benefited from the low-rate environment, they now have little financial incentive to refinance, or sell and buy again. With mortgage rates continuing to rise, the financial value of keeping their current low-rate mortgages is likely to increase.
In January of 2013, the mortgage industry witnessed the birth of a new income-underwriting era. The Consumer Finance Protection Bureau (CFPB) published new requirements for mortgage lenders to carefully assess a consumer’s ability to repay their mortgage loan. The new standards were dubbed the “ability-to-repay” rules and were set to take effect one year later in January 2014.
We’ve posted the June First American Loan Application Defect Index, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications. The Defect Index increased 1.2 percent in June 2017 as compared with the previous month, and increased 16.7 percent as compared to June 2016. The Defect Index is down 17.6 percent from the high point of risk in October 2013.