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Has mortgage fraud risk hit a turning point?

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Loan defect risk in purchase applications stopped falling and plateaued in October, according to First American Financial Corp.’s latest report.

“Defect risk for purchase transactions broke its six-month streak of declines in October. While still 8.5% lower than one year ago, defect risk remained flat compared with the previous month,” Mark Fleming, chief economist at First American, said in a press release.

October’s increase in mortgage rates was the first seen since November 2018, and may account for the plateau in purchase-application defect risk. Higher rates generally make it tougher for consumers to qualify for loans to purchase homes, putting more pressure on them to misrepresent application data.

However, mortgage rates during the month remained small enough to push lower-risk refinancing activity to a six-year-high, and the incidence of misrepresentation in this part of the market — as well for applications overall — continued to decline.

“Fraud risk began declining in March 2019 and reached a historical low in October,” Fleming said. “The Loan Application Defect Index for refinance transactions has followed a similar trend, declining 14.1% between March and October 2019.”

For all applications combined, the year-over-year change in defect risk was negative-13.9% and the consecutive-month change was negative-1.4%. For refi applications, the month-to-month change defect risk was negative-3.2%.

Only two states saw their defect risk rise year-over-year in October: South Dakota at 4.8% and New York at 2.4%.

Hartford, Conn., was the only core-based statistical area to experience an increase in defect risk. The incidence of misrepresentation in Hartford rose 3.2% year-to-year.

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