The default rate on mortgage applications continued to decline in August, mainly due to the fact that refinancing applications represented a larger share of the overall volume of applications.
Refinancing requests generally carry a lower risk of fraud than purchase requests, as the borrower’s information has, in most cases, been pre-verified.
The decrease in the defect rate resulted in a score of 60 on First American Loan Application Default Index.
The defect rate in all applications was down 1.6% from July and 17.8% from August 2019.
“The monthly drop is due to both the risk of purchase fraud and loan refinancing,” said Odeta Kushi, deputy chief economist at First American. “As the risk of refinance loan fraud continued to decline three months, this is the first time in five months that the risk of purchase loan fraud has decreased. However, the risk of purchase fraud remains 5.2% higher than a year ago.
The default rate on refinancing applications has decreased by almost 26% from a year ago and is at a new low in almost 10 years of existence.
“The risk of default, fraud and misrepresentation is considerably lower on refinancing transactions, but it is likely that the large investment in the mortgage finance industry and the adoption of fintech have contributed to the decline in the market. risk of refinancing fraud, ”says Kushi.
The purchase requisition defect rate fell 2.4% from July but was up 5.2% from August 2019.
Technology is another major factor that has caused defect rates to drop.
“As consumers rush to lock in historically low rates, financial technology and automation are not only saving time, but also reducing fraud,” Kushi adds. “The technology allows lenders to compare a borrower’s information with employment databases and can be used to flag missing or inconsistent data. These advancements, which help deliver a hands-on, digital and highly automated experience, have also improved the mortgage manufacturing and underwriting process, leading to lower levels of default risk. “