In August, the nation’s mortgage defect risk continued to ease, according to First American Loan Application Defect Index.

According to the company, the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage applications declined by 3.9% from the previous month.

When compared to the same time period in 2018, the nation’s defect risk retreated 5.2% from the previous year.

First American Chief Economist Mark Fleming said America’s falling defect risk is a recent phenomenon as the overall Defect Index has not been this low since January 2017.

“In late 2018 and early 2019, overall defect risk rose at a fast pace and continued to do so until reaching a peak in February 2019. Between July 2018 and February 2019, the overall Defect Index increased by 25%. And then, it stopped,” Fleming said. “In the second half of 2018, rising mortgage rates reduced the share of refinance transactions, leading to a greater share of higher-risk purchase transactions. Additionally, hurricanes and wildfires in the second half of 2018 contributed to climbing defect risk.”

So, what sparked the recent slide in fraud risk? Well, Fleming said it has a lot to do with the nation’s increased number of refinances and the housing market’s ever-changing landscape.

“Following the strong sellers’ market conditions throughout 2018, market dynamics shifted slightly toward buyers in 2019. Mortgage rates began to decline in January 2019 and are 0.8 percentage points lower in August than January,” Fleming said. “Meanwhile, household income, the other component of house-buying power, has continued to increase, rising 1.5% in August compared with January 2019.”

Fleming said the nation’s strong sellers’ market has reduced competition, which has made more potential home buyers feel less pressured to misrepresent information on their loan applications.

“For many homeowners, the most important consideration when deciding to refinance is whether the mortgage rate is sufficiently lower than their existing rate. The 30-year, fixed-rate mortgage in August averaged 3.6%, the lowest since October 2016,” Fleming said. “According to estimates, 11.6 million existing households would be refinancing candidates at a mortgage rate of 3.5 %, compared with just 2.9 million households when the mortgage rate is 4.5%.”

“As a result of lower rates, refinance applications are up 148% compared with one year ago, according to the latest MBA mortgage applications survey,” Fleming said. “Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, so the reduced risk of fraud and misrepresentation in 2019, and August, in particular, is largely due to the increasing share of lower risk refinance transactions within the mortgage market.”

According to First American’s report, the Defect Index for refinance transactions decreased by 4.3% in August, also declining 4.3% from 2018’s rate.

NOTE: First American’s Loan Application Defect Index measures the frequency of which defect indicators are identified. The index is benchmarked to a value of 100 in January 2011, meaning all index values are interpreted as the percentage change in defect frequency relative to that time, according to the company