The reduction in refinance activity as the mortgage industry pivots toward purchase transactions amid higher interest rates has caused loan defect and fraud risk to rise, according to First American Financial Corp.
The Santa Ana, Calif.-based title insurer's Loan Application Defect Index rose 5.8% month over month and 3.9% from a year earlier in January. The index for refinance deals was 9.2% lower than a year ago, while the index for purchase transactions was 1.2% higher.
The index measures the frequency of defects, fraudulence and misrepresentation in the information submitted with loan applications.
"This month, the Loan Application Defect Index continued the upward trend that started in December 2016,” Mark Fleming, chief economist at First American, said in a news release.
"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 added.
At the state level, Wyoming had the biggest increase in defect frequency, with a 32.2% jump year over year, followed by North Dakota and Montana. Michigan posted the largest decrease with a 14.3% drop.
