The risk of defects in mortgage applications increased in September, driven mainly by the impact from Hurricane Florence.
According to First American’s Loan Application Defect Index, the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 1.3% compared with August.
However, compared with September 2017, the overall risk of defects decreased by 6.0%.
“Since the beginning of the year, the defect index has steadily decreased nationally, falling 8.4% from January through July 2018,” says Mark Fleming, chief economist for First American, in statement. “However, the last two months have seen a reversal in this trend, with overall defect risk increasing 2.6% from August 1 through September 30.
“In fact, September is the first month this year to experience an increase in the defect index for purchase transactions,” Fleming adds. “While we have not yet seen the full impact of the hurricane season on defect risk trends, we already see preliminary defect risk spikes in states impacted by Hurricane Florence – North and South Carolina.”
Basically, the impact from the storm will create a ripple effect that won’t be fully felt until a month from now.
“Defect index trend data from 2017 provides a glimpse at what we might expect in the months ahead,” Fleming says. “Before Hurricane Irma hit Florida in 2017, defect risk was decreasing. However, following the storm, the trend reversed course in September 2017, rising 10% through December. Since December 2017, defect risk has declined in Florida.
“Unfortunately, historical trends indicate that we should expect defect risk to increase in Florida over the next few months,” Fleming adds.
Still, despite these impacts, the defect index is down 23.5% from the high point of risk in October 2013.
The risk of defects in applications for refinance transactions increased by 1.4% in September compared with August, but was flat compared with September 2017.
The risk of defects for purchase transactions increased by 1.3% compared with the previous month, but was down 11.1% compared with a year earlier.
It’s well-established that natural disasters impact loan application defect risk. Hurricanes, especially the flooding associated with them, create the potential and opportunity for significant misrepresentation of collateral condition and identity fraud in mortgage applications, first American notes.
“We’re seeing this potential for mortgage fraud risk become a reality,” Fleming says.
Recent estimates show that Hurricane Florence’s flooding and wind destruction damaged approximately 50,000 residential units, with nearly 80% of these homes located in North Carolina.
Worst-case projections estimate a total of $28.5 billion in flooding losses, plus an additional $1.5 billion in wind damage, First American estimates.
North and South Carolina experienced nearly identical monthly increases in the defect index in September, 5.3% and 5.2% respectively.
Interestingly, however, the states impacted by the storms did not see the highest annual increases in application fraud risk in September.
States with the greatest year-over-year increases in defect frequency included Hawaii (+9.7%), Maine (+8.6%), Alaska (+6.3%), Wyoming (+4.3%) and California (+3.9%).
States with the greatest decreases in defect frequency included Vermont (-19.4%), Minnesota (-18.6%), Arkansas (-17.0%), Alabama (-16.7%), and North Dakota (-15.7%).
