Coronavirus hurts home buying — but it also cuts mortgage defect risk

Mortgage loan application defect risk fell to an all-time low in March, as the coronavirus caused a reduction in home purchase activity, First American's monthly report said.

Purchase mortgage applications are more prone to misrepresentations because consumers and/or loan officers are more willing to fudge the truth to get into a home. As the home purchase market slows and competition recedes, that motivation diminishes.

However, a defect in and of itself on a mortgage loan application, is not proof of fraud but a red flag that needs to be investigated further.

March's index value of 61 was 1.6% lower than February's (the previous all-time low since First American started tracking this data in 2011) and nearly 36% lower compared with March 2019, when the index peaked at 95.

"The combination of economic uncertainty, shelter-in-place orders and tightening credit standards have made the purchase market less competitive, reducing pressure on potential home buyers to misrepresent information on a loan application," Odeta Kushi, First American's deputy chief economist, said in an email.

"Additionally, market dynamics in March favored lower risk refinance transactions over purchase transactions. As the share of refinance transactions increases within the mortgage market, fraud and misrepresentation risk declines. In March, refinance applications were 168% higher than one year ago."

The defect risk index for purchase loans tied its lowest point ever in March at 75, down 1.3% from February, and 25% from March 2019, when it was at 100.

The refinance defect index was unchanged from the prior month at its all-time low of 52. It was down 39.5% on a year-over-year basis.

There were three states that had higher defect risk in March compared with February: Oklahoma, up by 4.3; Tennessee, with a 1.5% rise; and Nebraska, which had a 1.4% increase.