MReport November 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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48 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION Risk of Loan-App Defects Decline Financial technology has played a major role in declining loan-application defects across the nation. F irst American Financial Corporation released its July 2018 First American Loan Application Defect Index at the end of August. Included in the index is an estimate of the frequency of defects, fraudulence, and misrepresentation in mortgage- loan applications. According to the index, the frequency of defects, fraudulence, and misrepresentation in loan applications fell 1.3 percent month- over-month. The defect-specific index fell the same percentage, marking the seventh month in a row in which the Defect Index has dropped. Year-over-year, the Defect Index decreased by 9.5 percent. First American Chief Economist Mark Fleming noted that nationwide, defects are down, except in two markets. "Nationally, the Defect Index decline of 7.3 percent in July relative to three-month moving average was driven by declining risk in all but two markets—New Orleans and Louisville, Kentucky. In every other market, loan ap- plication, misrepresentation, defect and fraud risk declined. In some markets, the decline was substan- tial," Fleming said. "In 39 markets, defect risk declined more than 5 percent, while the three-month decline in risk exceeded 10 per- cent in 11 markets." According to the index, South Carolina, Minnesota, Alabama, Vermont, and North Dakota saw the greatest reductions in defect frequency, falling around 20 percent year-over-year in each state. On a more local level, the five markets with the larg- est year-over-year decreases in defect frequency are Birmingham, Alabama; Raleigh, North Carolina; Minneapolis; Boston; and Austin, Texas. According to Fleming, financial technology played a large role in reducing risk of defects. "The mortgage finance industry's significant invest- ment in financial technology to deliver a convenient, digital, highly automated and all-around better homebuying experience has also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk," Fleming said. "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 major- ity of markets. The question is not where is defect risk declining, but when will it stop?" First-Time Buyers Drive Market Growth Low housing inventory remains a challenge, but it is not enough to deter first-time buyers. A limited housing inventory did not seem to keep first-time homebuyers out of the market in Q2 2018, according to the First Time Homebuyer Market Report from Genworth Mortgage Insurance. In Q2 2018, the first-time homebuyer market share was 572,000, a one percent increase year-over-year, accounting for 36 percent of total home sales and the largest number of first-time homebuyers for Q2 since 1999. "While low inventory and higher costs made it challenging for first-time homebuyers, it is remarkable that so many pur- chased homes in the first half of the year," said Tian Liu, Chief Economist, Genworth Mortgage Insurance. "In absolute numbers, 985,000 first-time homebuyers bought homes during the first half of 2018, the most since 2005. They continued to be very resilient and made up a large part of housing- related transactions." The report noted that inventory still poses a problem, as inven- tory has continued to decline, though at a more moderate rate. Additionally, new construction has not yet managed to keep up with demand from first-time homebuyers. Still, first-time homebuyers are the largest driving force behind the growing number of homebuy- ers. Thirty-six percent of single- family home sales and 55 percent of new purchase loans went to first-time homebuyers in Q2 2018. The report noted there were 2 million more homebuyers year-over-year in 2017, which means the 2.1 million first-time homebuyers accounted for the increase. Following a trough two years previously, homeownership rates have been steadily recover- ing, driven by new buyers and younger buyers. Homeownership increased by 2.4 percentage points for the under-35 age group and increased by 1.5 percentage points for the 45-54 age group. Liu analyzed what the influx of new buyers could mean. "More first-time homebuyers and fewer speculators mean that the housing market today is far more stable," Liu said. "Finally, between 2014 and 2017, first-time homebuyers accounted for around 80 percent of the growth in home sales, so the run-up in home prices has not been the result of speculative demand." "In absolute numbers, 985,000 first-time homebuyers bought homes during the first half of 2018, the most since 2005. They continued to be very resilient and made up a large part of housing- related transactions." — Tian Liu, Chief Economist, Genworth Mortgage Insurance

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