U.S mortgage rates are on the rise, leading to higher defect rates due to more fraud and misrepresentation in mortgage loan applications.“We have seen this before, in 2013, as mortgage rates rise, so does overall defect, fraud, and misrepresentation risk,” said Mark Fleming, Chief Economist at First American. In the last year the defect index has risen 20.3% since December 2017, although the overall defect index is still down 18.6% since its high point in 2013 . The defect idex for refinance transactions rose 21.1% since last year and the purchase transaction rose 12.3% since last year.
As stated in the article, “Much of the elevated risk can be attributed to an increase in the share of purchase mortgage transactions. It’s possible that all economists agree, that mortgage rates will increase in 2018, which should increase the market share of purchase mortgage transactions, putting upward pressure on the overall risk of defect, fraud, and misrepresentation.” The increase in purchase contracts stems from the rise in mortgage rates that have reduced the consumer benefit of refinancing their existing loans. With the rising mortgage rates the share of refinance transactions in overall mortgage transactions is predicted to decline in 2018 leading to more risk and higher a defect index.