Over the past few weeks, rising interest rates turned the mortgage markets away from refinances and toward purchases.
However, this move away from refinances also means a move towards riskier loans, according to First American Financial Corporation, a provider of title insurance, settlement services and risk solutions for real estate transactions.
First American released its Loan Application Defect Index for January 2017, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, which showed an increase of 5.8% from the previous month.
The Defect Index reflects estimated mortgage loan defect rates over time, by geography and by loan type. It’s 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, as well as state and market comparisons of mortgage loan defect levels.
“This month, the Loan Application Defect Index continued the upward trend that started in December 2016,” First American Chief Economist Mark Fleming said. “The overall index increase is largely the result of waning refinance activity in the mortgage market.”
“Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the increased risk of misrepresentation and fraud is due to the increasing share of higher risk purchase transactions within the mortgage market,” Fleming said.
But while the risk is higher, it is still down 28.4% from its peak in October 2013.
“While technology adoption has reduced risk for both purchase and refinance transactions, part of the overall decline in risk has been due to the recent dominance of refinance activity relative to purchase activity,” Fleming said. “As the mortgage market composition continues to shift toward purchase transactions in 2017, the risk of defect, fraud and misrepresentation will also increase.
In real estate, location matters,” he said. “In defect, misrepresentation and fraud risk, loan purpose matters.”
