Fintech Investment Having Positive Effect on Loan Defects

Mike Sorohan msorohan@mba.org

September 05, 2018

First American Financial Corp., Santa Ana, Calif., reported loan defects in mortgage loan applications decreased by nearly 10 percent from a year ago--and said the real estate finance industry has fintech to thank.

The company's July Loan Application Defect Index reported in mortgage loan applications decreased by 1.3 percent compared from June. From a year ago, the Defect Index decreased by 9.5 percent. The Index is down by 25.4 percent from its high-water mark in October 2013.

The report said the Defect Index for refinance transactions was unchanged in July from June and is 2.8 percent lower than a year ago. The Defect Index for purchase transactions decreased by 1.3 percent from June and is down by 13.2 percent from a year ago.

"The mortgage finance industry's significant investment in financial technology to deliver a convenient, digital, highly automated and all-around better home-buying experience has also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk," said First American Chief Economist Mark Fleming. "The benefits of this investment are not geographically specific, so it's no surprise that we see the impact of this investment in the vast majority of markets. The question is not where is defect risk declining, but when will it stop?"

The report noted declining risk in all but two markets, New Orleans and Louisville, Ky. In every other market, loan application, misrepresentation, defect and fraud risk declined. In some markets the decline was substantial. In 39 markets, defect risk declined more than 5 percent, while the three-month decline in risk exceeded 10 percent in 11 markets.

The report said only two states posted a year-over-year increase in defect frequency: Maine (+1.4 percent) and Hawaii (+1.1 percent). States with the greatest year-over-year decrease in defect frequency were South Carolina (-24.7 percent), Minnesota (-20.7 percent), Alabama (-20.0 percent), Vermont (-19.8 percent), and North Dakota (-18.6 percent).

Among the largest 50 metros, markets with the greatest year-over-year increase in defect frequency were Virginia Beach, Va. (+12.8 percent), Los Angeles (+10.8 percent), Orlando, Fla. (+9.6 percent), San Diego (+4.9 percent), and Memphis, Tenn. (+2.6 percent). Markets with the largest year-over-year decrease in defect frequency were Birmingham, Ala. (-27.3 percent), Raleigh, N.C. (-24.7 percent), Minneapolis (-23.3 percent), Boston (-19.5 percent) and Austin, Texas (-19.0 percent).

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