The risk of defects in loan applications decreased 2.8% in July compared with June and decreased 16.7% compared with July 2015, according to First American Mortgage Solutions’ Loan Application Defect Index.
What’s more, the index is down 31.4% compared with the high point of risk in October 2013.
As is typical, the risk of defects in applications for refinances was lower compared with the risk of defects in applications for purchases.
The risk of defects in applications for refinances decreased 1.7% compared with June and decreased 18.1% compared with July 2015.
The risk of defects in applications for purchases decreased 1.3% compared with June and decreased 13.2% compared with a year earlier.
First American pointed out that the risk of defects in applications for refinances has been dropping faster than that of purchases since hitting a peak in late 2013. Since then, the risk of defects in applications for refinances has fallen 41.0% as compared with 24.0% for purchase transactions.
“The defect index continues to improve as the share of refinance activity in the market remains strong,” said Mark Fleming, chief economist at First American, in a statement. “According to the latest Mortgage Bankers Association mortgage applications survey, the refinance share of mortgage applications remains above 60 percent. The housing market continues to benefit from historically low mortgage rates, which are driving lower defect-risk refinance activity. The average rate for a 30-year, fixed-rate mortgage fell in July to 3.44 percent from 3.57 percent in June. Other than between October 2012 and January 2013, this marks the lowest mortgage rates have been since Freddie Mac began tracking mortgage rates in 1971. To the extent that lower defect-risk refinance applications continue to occupy a large share of the mortgage market, the overall index will benefit.
“The benefits in compliant loan production processes are becoming more clearly evident, particularly for refinance transactions, in the big declines we are observing in loan application and mortgage defect risk,” Fleming added. “Refinance activity, fueled by historically low mortgage rates, combined with improved loan manufacturing processes are resulting in higher-quality loan applications with the lowest level of defects and misrepresentation that we have seen in recent history.”
States that saw the biggest year-over-year increases in defect frequency in July included Maine (+16.7%), North Dakota (+11.9%), Missouri (+5.6%) and Montana (+2.6%).
States that saw the biggest decreases in defect frequency included Michigan (-33.0%), Florida (-24.5%), New Mexico (-21.0%), Connecticut (-20.9%) and New Hampshire (-20.3%).
This month’s report includes special focus on South Carolina, which has seen a rapid increase in misrepresentation risk and is currently “the second-highest risk state in the nation.”
“For example, Columbia tracked consistently with the national average for loan application defect and misrepresentation risk until late 2015 but, over the course of this year, has reversed course,” Fleming said. “Defect risk in Columbia has increased 14.5 percent in the last 12 months.”
Driving the increase in South Carolina is the fact that the state currently has a strong purchase market due, in part, to the fact that it is seeing a construction boom.
“South Carolina, like much of the South, is benefiting from increased demand for real estate of all types, as people are attracted by the relatively low cost of housing compared to markets in the West or Northeast,” Fleming said. “In fact, the combination of low interest rates and income growth in South Carolina has caused real, consumer buying-power adjusted, house prices to decline 1.1 percent in July as compared to a year ago. More affordable house prices continue to support growing demand.”