Rising interest rates have turned homeowners away from refinances, and more people towards purchases. However, this also means that with the market moving away from refinances, the market is moving into riskier loans, according to First American Financial Corporation, a provider of title insurance, settlement services and risk solutions for real estate transactions.
Last week, the total volume of mortgage applications was down 21 percent compared to a year ago, according to the Mortgage Bankers Association. The lack of refinance applications greatly drove the decrease in the volume.
First American released its Loan Application Defect Index for January 2017, a report which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications. The report showed an increase of 5.8 percent from the previous month.
The Index also reflects the estimated mortgage loan defect rates over time, sorting it by geography and by loan type. The Index is offered as an interactive tool that can be tailored to reflect trends by category, including amortization type, loan purpose, property, transaction type and lien position. It can also be tailored to reflect the state and market comparisons of mortgage loan defect levels.
“This month, the Loan Application Defect Index continued the upward trend that started in December 2016,” First American Chief Economist Mark Fleming said. “The overall index increase is largely the result of waning refinance activity in the mortgage market.”
“Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the increased risk of misrepresentation and fraud is due to the increasing share of higher risk purchase transactions within the mortgage market,” Fleming said.
The risk is indeed higher, but it is still down 28.4 percent from its peak in October 2013.
“While technology adoption has reduced risk for both purchase and refinance transactions, part of the overall decline in risk has been due to the recent dominance of refinance activity relative to purchase activity,” Fleming said. “As the mortgage market composition continues to shift toward purchase transactions in 2017, the risk of defect, fraud and misrepresentation will also increase.”
“In real estate, location matters,” he continued. “In defect, misrepresentation and fraud risk, loan purpose matters.”
However, despite the continued rise in rates, mortgage rates seemed to ease up for Monday, with many of the closely watched rates slightly falling. The 30-year fixed rate mortgage, 15-year fixed rate mortgage, as well as the 5/1 adjustable-rate mortgage (ARM) all saw a decrease on Monday.