Oct. 2015 - Diversified We Stand, Divided We Fall

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TH E M R EP O RT | 39 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Mortgage Loan Application Defects Head Up in July While up over the month in July, defective applications were down over the year and remain well below their peak. F irst American Financial Corporation's Loan Application Defect Index for July 2015 found the mortgage loan defect rate rose 4.9 percent in July compared to June. The Defect Index, which esti - mates the frequency of defects in the information submitted in mort- gage loan applications and reflects them over time by geography and by loan type, increased 4.9 percent in July and decreased 5.6 percent compared to this time last year. The index is down 17.5 percent from the high point of risk in September 2013. "After seeing improvement in the national mortgage loan defect trend last month, the index has returned to the trend of increasing risk that we have observed since the begin - ning of 2015," said Mark Fleming, chief economist at First American. In recent months, the Defect Index for refinance transactions has increased dramatically. While still 6.3 percent lower than a year ago, its estimated defect incidence is up 8.7 percent month-over- month and up 7.1 percent over the last three months. Meanwhile, the adjustable-rate mortgages (ARM) continue to have consistently higher levels of application defect, and fixed-rate mortgage defect risk surged with an 8.4 percent increase from the previous month. According to First American, the five states with the highest month- over-month increase in defect fre - quency are: Oklahoma (+14 percent), Hawaii (+13.1 percent), Louisiana (+10 percent), Texas (+10 percent), and Colorado (+9.3 percent). Among the top five states with the highest month-over-month decrease in defect frequency were: Iowa (-11.4 percent), Massachusetts (-5.4 percent), Alaska (-5.3 percent), the District of Columbia (-4.7 percent), and West Virginia (-3.1 percent), the report found. "What remains consistent from last month is the concentration of defect risk in the same hand - ful of key markets in the south, particularly in Florida and Texas, as well as in the Northeast and up- per Midwest," Fleming said. "This month, major metropolitan areas in Florida and Texas continue to produce defect frequency levels well above the current national level." criminal background check. Additionally, in 2014, the Ability to Repay rule was imple- mented, which prohibited "stated income" loan programs for most mortgage loans. Lenders have also taken steps to reduce operational and misrep - resentation risk, including careful watch of quality control results for loan officer compensation and underwriters, which are more frequent and comprehensive than prior to 2008, the report found. Underwriting and loan origina - tion departments are now typi- cally separated to allow for greater underwriting independence, and communication between loan of- ficers and appraisers is limited. Technology advancements such as fraud risk tools and publicly available housing information on the Internet have also played a key role in reducing risk, Fitch said. Interthinx, Inc., a subsidiary of First American Financial Corporation and provider of comprehensive risk mitigation solutions for the financial ser - vices industry, released its annual interactive Mortgage Fraud Risk Report in June, which includes data collected in 2014 from loan applications processed by the Interthinx FraudGUARD system. The report found the 2014 Annual Mortgage Fraud Risk Index value decreased by 4 percent from 2013 to 100. This is a sign that the gradually rising trend observed in the previous four years has come to a stop. Of the four type-specific fraud risk indices Interthinx tracks; including prop - erty valuation, identity, occupancy, and employment/income; only property valuation risk increased, experiencing a rise of of 17 percent. "After three years of increas - ing fraud risk, the 2014 data show both an overall decrease and a shift to more localized concentrations of specific fraud types," said Jeff Moyer, chief product and strategy officer at First American Mortgage Solutions. "In no way diminishing the imperative for lenders, servicers and investors to remain vigilant, overall market stabilization does al - low our industry to focus on more highly targeted strategies to address specific fraud threats."

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