Loan Defect Rate Drops as Refinances Boom

Loan defects and misrepresentation are occurring at the lowest levels in recent history thanks to the refinance boom spurred by low interest rates and better loan manufacturing processes, according to First American Financial Corp.

First American reported Wednesday that its Loan Application Defect Index dropped 2.8% month-over-month in July and 16.7% from a year earlier. For refinance transactions, the Defect Index fell 1.7% from June and 18.1% from July 2015.

"The benefits in compliant loan production processes are becoming more clearly evident, particularly for refinance transactions, in the big declines we are observing in loan application and mortgage defect risk," First American chief economist Mark Fleming said in a news release.

"Refinance activity fueled by historically low mortgage rates, combined with improved loan manufacturing processes, are resulting in higher-quality loan applications with the lowest level of defects and misrepresentation that we have seen in recent history."

The Defect Index also decreased for purchase transactions, dipping 1.3% from June and 13.2% from a year ago.

The state with the highest increase in the defect rate was Maine, where it rose 16.7%, followed by North Dakota, Missouri and Montana. Michigan had the biggest decrease at the state level with a 33% drop, followed by Florida, New Mexico, Connecticut and New Hampshire.

At the metropolitan level, St. Louis was the only market among the 50 largest metropolitan areas to experience an increase in its defect rate, which rose 4.1%. Detroit, meanwhile, had the biggest decline nationwide with a 37% decrease.

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Originations Risk management Refinance
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