The overall risk of “defects” in mortgage applications decreased 1.2% in September compared with August and was down 20.3% compared with September 2016, according to First American Mortgage Solutions’ Loan Application Defect Index.
“Defects” can be a result of intentional fraud or simply errors in loan application data.
The overall risk was down 18.6% compared with the high point of risk in October 2013.
The risk of defects in applications for refinances was flat compared with August but was up 18.6% compared with September 2016.
The risk of defects in applications for purchases decreased 1.1% compared with the previous month but was up 12.5% compared to a year earlier.
According to the report, Hurricanes Harvey and Irma helped boost the risk of application defects in September.
In particular, the storms increased the risk of fraudulent or unintentional misrepresentation of collateral condition in the impacted areas.
“In September, the overall risk of defects, fraud and misrepresentation declined for the first time this year, although there are regions with higher defect risk due to recent natural disasters,” says Mark Fleming, chief economist at First American, in a statement. “Unfortunately, historical data indicates that natural disasters and loan application defect risk go hand-in-hand.”
“Our defect, misrepresentation and fraud risk index identified signs of this risk trend in Texas and Florida this month and particularly in Houston, where risk increased the most among all the major markets we track,” Fleming adds. “In Houston, which was severely impacted by flooding, defect, fraud and misrepresentation risk surged 7.2 percent, the largest month-over-month increase among the top 50 metropolitan markets. Flooding is associated with elevated risk for misrepresentation of collateral risk condition.”
Fleming also adds that “prior to the hurricanes, defect risk in Florida and Texas was declining, but that trend [was] reversed in September.”