Refinance Boom Decreasing Fraud Risk, According to First American’s Loan Application Defect Index - Seite 2

More Refinances, Less Fraud

“The 30-year, fixed mortgage rate has been declining since December 2018, and in July 2019 reached 3.8 percent, the lowest rate since November 2016. As mortgage rates fall, the incentive to refinance increases,” said Fleming. “For many homeowners, the most important consideration on whether to refinance or not is if the mortgage rate is sufficiently lower than their existing rate.

“The prevailing mortgage rate of 3.8 percent in July triggered a 25-percent jump in refinances month over month and a 60-percent jump compared with July 2018,” said Fleming. “Why does this matter for fraud risk? Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, so the reduced risk of fraud and misrepresentation in July is largely due to the increasing share of lower risk refinance transactions within the mortgage market.

“This trend has surfaced in previous refinance booms. Fraud risk reached a low point in November 2016 amid the refinance boom between the fourth quarter of 2015 and third quarter of 2016, which pushed the share of refinance originations from 46 percent to 51 percent,” said Fleming. “Similarly, in 2012, overall fraud risk declined 4.7 percent, as the mortgage rate declined from 3.9 percent to 3.6 percent between the first quarter of 2012 and fourth quarter of 2012 and the share of refinances increased from 68 percent to 72 percent. As the chart shows, trends in the overall Defect Index often coincide with shifts in refinance activity in the mortgage market.

“The 30-year, fixed mortgage rate continued to decline in August, which is likely to boost refinance demand even further,” said Fleming. “In fact, according to estimates, the number of existing households that would be refinance candidates would increase to 11.6 million at a mortgage rate of 3.5 percent (as the prevailing rate would be at least 0.75 percentage point lower than their current rate), compared with just 2.9 million households when the mortgage rate is 4.5 percent. As the mortgage market composition continues to shift toward refinance transactions in 2019, the risk of defect, fraud and misrepresentation will continue to decline.”