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Loan Application Defects Are Down From 2019

GSE loans

The Loan Application Defect Index (LADI) remained steady in October compared with the prior month but remains 10% lower than October 2019; purchase-loan fraud risk increased 1.2% month-over-month, and less risky refinance fraud risk did not change, according to First American Mortgage Solutions' Loan Application Defect Index [1], which examines various portions of loan applications for the month of October. The research is updated monthly during the last week of the month.

The monthly index estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard system. The index is based on the frequency with which defect indicators are identified. The data—which delves into whether the information on a loan is correct, misrepresented, or even potentially fraudulent— is useful when assessing the amount of risk on a loan, according to First American's economists.

First American's Deputy Chief Economist Odeta Kushi offers some insight into this month's report:

Compared with single-family properties, loan applications for multi-unit properties have historically been riskier, she noted. In October, fraud risk only increased for multi-unit and planned unit developments (PUDs) on a month-over-month basis, 1.2% and 1.6%, respectively ... Fraud risk for single-family properties remained the same compared with one month ago. The stability in single-family fraud risk is contributing to the steadiness of overall fraud risk, especially as market preferences tilt towards single-family homes [2]," she said.

Kushi added, "More important for fraud risk is the continued sellers’ market [3], which may pressure homebuyers to misrepresent information on their loan application to win the bid for a home. The winter months should cool the hot sellers’ market, which may relieve pressure on overall fraud risk."

First American's report includes trends from a national perspective as well as changes by state, market, and category. It can be viewed in its entirety at firstam.com [1].