September 12, 2019
Loan Application Defect Risk Rose in February
Following the 2008 housing crash, lenders and bankers began taking risk and defect management more seriously than they did previously. While most had quality control departments, they were considered basically a necessary evil, just a cost of doing business—the idea that they might confer actual measurable benefit was looked at askance, and the process was mainly done by randomly sampling loans on which to perform audits.
No longer. Now reducing loan defects and the risks that come with them—and monitoring these risks throughout the lifespan of a loan—are held to be as important as any other element of the lending process. These days the way lenders identify loans for audit is via a more discretionary sampling method, using loan characteristics and a risk score.
The goal, for lenders, is to determine which loans are at higher risk for default, and to identify the most common defects. And, further, to determine why.
So when loan application defect risk rose in February—jumping 4.4 percent from the previous month, according to First American’s Loan Application Defect Index, and up a full 14.5 percent year-over-year—it was necessary that the industry understand why that was.
It appears that the rise can be chalked up to a number of factors: As home prices increased under the stress of low inventory, buyers came up against the necessity to seek qualification for higher loan amounts. Meanwhile, during this same period purchase loans increased through 2018, while refinance loans decreased due to rising interest rates. It is a truism in the industry that purchase loans are much more likely to have fraud than refinance loans.
But mortgage rates began falling late in the year, as did the rate in home price rise, and we saw some increase in construction after a lackluster summer 2018. This leads experts to believe that when the income-related risk in 2019 is tabulated, it will be seen to have plateaued.
If you’re looking to buy a property in Jacksonville, Florida; Rockport, Massachusetts; or Cumberland, Rhode Island, don’t commit fraud in your loan application. Once you have that loan and head to closing, you’ll need a title search to ensure you gain clear title to your property in order to mitigate risks—in case a storm or other natural disaster in the past scrambled the property’s title, for example. At Topouzis & Associates, P.C., we perform extensive title searches in these three states, and we provide Owners Policies of Title Insurance. Contact us for more details.