First American Financial has released the First American Loan Application Defect Index for February 2020, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications.
The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 4.6% compared with the previous month. Compared to February 2019, the Defect Index decreased by 34.7%. The Defect Index is down 39.2% from the high point of risk in October 2013.
The Defect Index for refinance transactions decreased by 5.5% compared with the previous month, and decreased by 39.5% compared with a year ago. The Defect Index for purchase transactions decreased by 2.6% compared with the previous month, and is down 23.2% compared with a year ago.
“A historical view of overall defect risk, as measured by our Loan Application Defect Index, shows a long-run downward trend since we began tracking defect risk in 2011, with a few exceptions,” said Mark Fleming, chief economist at First American. “In February 2020, this long-run trend continued as overall defect risk reached its lowest level in index history.”
“The Defect Index for purchase transactions fell by 2.6% compared with the previous month, while the Defect Index for refinance transactions fell by 5.5%, pulling the overall defect risk level to this new low point. While various dynamics drive fraud risk in the short run, there are two forces that have consistently reduced fraud risk over approximately the last 10 years: policy and technology innovation.”
The mortgage finance industry’s significant investment in financial technology is a major driver of the long-run decline in fraud risk, according to Fleming. “For example, advancements in mortgage technology allow lenders to compare a borrower’s information against employment databases and other data sources, and algorithms can inspect whether recent bank account deposits are consistent with a borrower’s paystubs. Technology can also be used to flag missing or inconsistent data. These advancements, which help to deliver a convenient, digital, highly automated and all-around better home-buying experience, have also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk.”