The risk of defects in mortgage applications increased 22.1% on a year-over-year basis in October, due mainly to an increase in the risk of misrepresentation in property condition in the areas impacted by hurricanes Harvey and Irma, according to First American Financial Corp.’s Loan Application Defect Index.
However, the overall level of risk, as per the index, was flat compared with September.
“The surge in defect, fraud and misrepresentation risk that started a year ago has finally lost momentum,” says Mark Fleming, chief economist at First American, in a statement. “The Loan Application Defect Index has either remained unchanged or declined in every month since July, and the index value is the same level as in the summer of 2015.”
Fleming, however, points out that it is normal for application fraud risk to increase in areas ravaged by storms.
“The data seems to validate our belief that there is a correlation between natural disasters and rising loan application defect risk,” he says. “Our defect, fraud and misrepresentation risk index shows the largest month-over-month increases in defect risk are in hurricane-impacted markets. Even Houston, one of the largest markets in the country, is not immune to the rising defect risk.”
Still, the overall index is down 18.6% from the high point of risk in October 2013.
The defect index for refinance transactions decreased 1.4%, month-over-month, but was 19% higher compared with October 2016.
The defect index for purchase transactions remained unchanged compared with the previous month but was up 12.5% from a year earlier.
The report shows that the areas that were hit hardest by the storms have the greatest risk of purchase application fraud – due mainly to misrepresentation of property condition.
“This month, four of the five markets with the greatest increases in defect risk compared with September are in Florida and Texas,” Fleming says, adding that those markets included Lakeland, Fla. (up 11.9%); Virginia Beach, Va. (up 8.4%); Cape Coral, Fla. (up 5.9%); Orlando, Fla. (up 5.9%) and Houston (up 5.6%).
“In fact, looking at the national map, there is a clear concentration of defect risk across the southern part of the country,” Fleming adds.
Local markets that saw the biggest year-over-year increases in application defect risk in October included Virginia Beach, Va. (up 47.5%); Raleigh, N.C. (up 34.8%); Orlando, Fla. (up 28.6%); Kansas City, Mo. (up 27.4%); and Louisville, Ky. (up 27.1%).