“The First American Loan Application Defect Index fell 2.5 percent in October as compared with September and decreased by 10.2 percent as compared with October 2014,” First America wrote in a release sent to Paydayloans247. “The Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type, is down 22.3 percent from the high point of risk in October 2013.”
The index estimates the frequency of defects, fraudulence and misrepresentation on mortgage applications.
According to First America, ability-to-pay rules are reducing income-related fraud risk because those misrepresenting income are now more likely to get caught.
“Fraudulent and misrepresentative loan applications are continuing to decline, as our risk index is trending toward the lowest point we have recorded in the last five years. The reduction in risk is occurring across property type, occupancy, loan purpose, and whether a conforming conventional or FHA
, USDA loan,” said Mark Fleming, chief economist at First American. “While risk is declining overall, there are still categories of loans that are riskier.
“In particular, self-reported investor, ARM, purchase, and multi-unit transactions have heightened defect, fraud, and misrepresentation risk.”
And while originators may have lamented tighter underwriting standards, they are having a positive impact on the industry, overall, according to First America.
“One of the clearest benefits of more stringent underwriting standards related to the ability of a borrower to sustainably pay their mortgage can clearly be seen in the improvement in the income-specific defect risk index. Income-related defect, misrepresentation and fraud risk is down 49 percent from its peak in December 2012,” said Fleming. “Given the heightened scrutiny of a borrower’s ability to pay, intentionally misrepresenting one’s income for fraudulent gain is more likely to get caught.”
A title insurer’s index for application fraud dropped in October.