GlobeSt.com: What are the main ways you anticipate loan-application defect and fraud risk to change in 2017?

Fleming: I expect loan quality to continue to improve as we see the continued adoption of automation and data validation in the loan-origination process. Although, countering these improvements, the market will shift to loan products with higher defect and fraud risk.

GlobeSt.com: What currently existing factors will influence this risk, and what new factors do you expect to emerge next year?

Fleming: Current factors expected to continue are the trends toward automation and data validation. New factors in 2017 will be the rise in the share of adjustable-rate mortgages and expansion of credit availability.

GlobeSt.com: How are automated verification tools affecting risk, and how will these tools continue to change?

Fleming: Risk is not being shifted by automation tools, but rather the automation tools are more efficiently identifying risk, and identifying the risk very early in the process. This will likely benefit the industry with greater decision certainty early in the mortgage transaction and improve the experience for the consumer.

GlobeSt.com: What else should our readers know about loan-application defect and fraud risk in 2017?

Fleming: Loan-application and defect risk will quickly evolve in 2017, since we expect the adoption of data and analytically driven processes to only increase in the year ahead.

IRVINE, CA—Automation tools are more efficiently identifying risk very early in the process, benefiting the home-loan-application industry and improving the consumer's experience, First American Financial Corp.'s chief economist Mark Fleming tells GlobeSt.com. In the firm's recent Loan Application Defect Index report, Fleming commented on the impact of automated verification tools on loan risk, the possible shift in the loan mix to adjustable-rate mortgages and what that means for loan risk.

“The long and consistent downward trend in loan-application defect and misrepresentation risk paused [in November 2016] after falling in seven of the last eight months,” Fleming said in the report. “Yet, I expect the risk trend to continue its downward trajectory in 2017. The Day 1 Certainty initiative at Fannie Mae and incorporation of similar automated verification tools at Freddie Mac are likely to have a significant positive impact on mortgage-loan-application defect and misrepresentation risk in the next year.”

Regarding the ARMs race, Race, Fleming said that 2017 “is expected to be a transition year for loan-application defect, misrepresentation and fraud risk. Rising rates in the market will drive a transition to more purchases relative to refinances and more ARMs relative to fixed-rate loans. All other factors being equal, both of these trends point to increased defect, misrepresentation and fraud risk.”

We sat down with Fleming to discuss how he expects loan-application defect and fraud risk to change this year and how automated verification tools are affecting risk.

GlobeSt.com: What are the main ways you anticipate loan-application defect and fraud risk to change in 2017?

Fleming: I expect loan quality to continue to improve as we see the continued adoption of automation and data validation in the loan-origination process. Although, countering these improvements, the market will shift to loan products with higher defect and fraud risk.

GlobeSt.com: What currently existing factors will influence this risk, and what new factors do you expect to emerge next year?

Fleming: Current factors expected to continue are the trends toward automation and data validation. New factors in 2017 will be the rise in the share of adjustable-rate mortgages and expansion of credit availability.

GlobeSt.com: How are automated verification tools affecting risk, and how will these tools continue to change?

Fleming: Risk is not being shifted by automation tools, but rather the automation tools are more efficiently identifying risk, and identifying the risk very early in the process. This will likely benefit the industry with greater decision certainty early in the mortgage transaction and improve the experience for the consumer.

GlobeSt.com: What else should our readers know about loan-application defect and fraud risk in 2017?

Fleming: Loan-application and defect risk will quickly evolve in 2017, since we expect the adoption of data and analytically driven processes to only increase in the year ahead.