Loan Defects Up Since 2017

The frequency of loan defects, fraud, and misrepresentation in the information submitted in mortgage loan applications remained flat in April 2018, but increased slightly over April 2017. That’s according to the latest release of the Loan Application Defect Index, published Wednesday by First American.

As explained in the release, First American’s Loan Application Defect Index (LADI) “reflects estimated mortgage loan defect rates over time, by geography and loan type.” The LADI held steady between March and April 2018, but increased slightly year-over-year (YOY), rising by 1.2 percent.

The Defect Index for refinance transactions increased by 1.4 percent over March 2018, and was up 7.6 percent year-over-year. The Defect Index for purchase transactions, however, decreased by 2.2 percent month-over-month and increased 2.2 percent year-over-year.

For a bit of longer-term perspective, the Defect Index peaked in October 2013—since then, it has decreased by 19.6 percent.

The five states demonstrating the greatest YOY increase in loan defects are Arkansas (+16.7 percent), Wyoming (+13.5 percent), New Mexico (+13.0 percent), Virginia (+12.2 percent), and Maryland (+10.8 percent). On the other end of the spectrum, South Carolina featured the greatest YOY decrease (-13.3 percent), followed by Louisiana (-12.9 percent), Minnesota (-10.6 percent), Alabama (-10.0 percent), and Vermont (-9.6 percent).

The report also examines the long-term impact of the “ability-to-repay” rules implemented in 2014 on loan defects in the years since. In January 2014, a new set of “requirements for mortgage lenders to carefully assess a consumer’s ability to repay their mortgage loan” went into effect after having been introduced by the Consumer Financial Protection Bureau.

“Since the ability-to-repay rules were issued, there has been a precipitous and significant decline in income-specific mortgage loan application misrepresentation, defect, and fraud risk,” said Mark Fleming, Chief Economist for First American. “In fact, our income-specific metric within the Loan Application Defect Index reached its peak in December 2012, one month before the rules were issued. By September 2013, nine months later, the income-specific defect risk metric declined 33 percent, as lenders implemented new loan manufacturing and underwriting practices in preparation for the effective start of rule in January 2014. Since then, income-specific defect and fraud risk has continued to decline and is currently 70 percent below its peak prior to publication of the ability-to-repay rules.”

You can lean more about First American's Loan Application Defect Index by clicking here.