Mortgage fraud risk on applications dips for first time since July

Mortgage application fraud risk declined for the first time since last summer because the home sales market became less competitive with an easing of the inventory shortage, First American said.

April's index is 91, down 4.2% from March's 95, but 11% higher than 82 in April 2018.

"This marks the first month-over-month decline since July 2018, thanks to lower mortgage rates," Mark Fleming, chief economist at First American, said in a press release. "Decreasing mortgage rates contributed to an increase in inventory, reducing the competitive pressure on the housing market, as well as contributing to an increase in lower-risk refinance transactions. In line with this trend, the defect index for purchase transactions declined for the first time in eight months, falling 4% in April compared with the previous month."

April's purchase defect index was 96, down from 100 in March, but up from 87 one year prior. March's index value was the highest since November 2013. The refi defect index was 83 in April, down from 86 in March, but up from 71 one year prior.

Between February and March, the overall index was unchanged because lower rates spurred growth in refinance applications, which are inherently less risky than purchases, Fleming pointed out. But that was balanced out by the hot sellers' market during that time frame, which motivated buyers to misrepresent information on their loan applications in order to qualify for a larger mortgage.

It was a different story in the following month.

"The mix of refinance and purchase activity fluctuated within the month of April. Refinance activity increased in the first half of the month as mortgage rates declined. However, lower mortgage rates also fueled an increase in purchase transactions, as buyers took advantage of their increased house-buying power," said Fleming.

"In fact, purchase applications hit their highest level in nine years toward the end of April. While loan application defects can happen on both purchase or refinance transactions, there is a higher propensity for fraud and misrepresentation with purchase transactions."

Many potential sellers sidelined by higher mortgage rates decided to return to the market, Fleming said, pointing to National Association of Realtors data that the supply of homes for sale grew to 1.83 million units in April, up from 1.67 million in March. More listings reduces competition among buyers.

"Potential buyers feel less inclined to misrepresent information on a loan application when they don't feel the pressure of a hot sellers' market. Indeed, misrepresentation of income and employment both fell this month, by 1.7% and 3.6%, respectively," said Fleming.

If mortgage rates, which ducked below the 4% mark according to the most recent Freddie Mac survey, were to fall further, that would continue to reduce the risk of misrepresentations on purchase applications. At the same time, refinance activity should continue to rise.

"If so, we may anticipate the continued downward trend in defect risk and misrepresentation, with further increases in refinance transactions and inventory, resulting in less pressure on the market," said Fleming.