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Day 1 Certainty Should Lower Loan Defect Risk: First American

Fannie Mae's Day 1 Certainty initiative and automated verification tools at Freddie Mac are set to improve mortgage loan application defect and misrepresentation risk in 2017, according to a report from First American Financial Corp.

These expectations come as improvements in the frequency of defect, fraudulence and misrepresentations came to a standstill in November. First American's Loan Application Defect Index remained unchanged from October to November – though the index did drop 12.8% year over year. The index dropped by 3.4% month over month for refinance transactions.

In the year ahead, loan application defects and misrepresentation could rise because of market conditions, not accounting for the programs from the government-sponsored enterprises.

"Rising rates in the market will drive a transition to more purchases relative to refinances and more adjustable rate mortgages relative to fixed-rate loans," said First American chief economist Mark Fleming in a news release. "All other factors being equal, both of these trends point to increased defect, misrepresentation and fraud risk."

Despite this though, Fleming does believe this risk will actually diminish in the year ahead.

"I expect the risk trend to continue its downward trajectory in 2017," he said. "The Day 1 Certainty initiative at Fannie Mae and incorporation of similar automated verification tools at Freddie Mac are likely to have a significant positive impact on mortgage loan application defect and misrepresentation risk in the next year."

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