Mortgage application defects at new low with more refis in pipeline

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Mortgage loan application defect risk is at the lowest point since First American started tracking this data, strictly as a function of the shift to a refinance market.

The First American Loan Application Defect Index dipped to 65 for January, two points lower than December's 67, the previous all-time low, and 91 in January 2019.

Refinance defect risk moved down every month since March 2019. In January, this index component also reached an all-time low of 55; the previous low was in December 2016 at 57.

But the risk for purchase transactions remained flat in January at 78, after rising in November and December. These applications are considered more susceptible to deceptive acts because of their purpose to acquire a property. This index is still much lower than January 2019's value of 95.

Application defects are a red flag, but not necessarily a sign of committed mortgage fraud.

Going forward, mortgage application defect risk should continue to drop in tandem with interest rates.

"This trend has surfaced in previous refinance booms and mini-booms," said First American Chief Economist Mark Fleming in a press release. "When refinance transactions boom, fraud risk falls."

He pointed to 2012, when fraud risk declined 4.7% as mortgage rates fell from 3.9% to 3.6%.

"Similarly, fraud risk reached a low point in November 2016 amid the refinance boom between the fourth quarter of 2015 and third quarter of 2016, which pushed the share of refinance originations from 46% to 51%.

"In February, the 30-year, fixed-rate mortgage fell to its lowest level since October 2016. Refinance mortgage applications in February have already spiked in response, with the industry citing a mini refinance boom. If the mortgage market composition continues to shift toward refinance transactions in 2020, the risk of defect, fraud and misrepresentation will continue to decline," Fleming said.

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Mortgage fraud First American Financial Corp. Refinance Purchase Housing market
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