The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 4.4% in February compared with January and was up 14.5% compared with February 2018, First American’s Loan Application Defect Index shows.
Driving the increase was the ongoing shift to a purchase market and the return to seller’s market conditions.
Purchase loan applications are more likely to include defects because borrower information is being collected for the first time. So, as purchase share increases, so, too, does the risk of defects.
“Furthermore, in the strong seller’s market we experienced in 2018, borrowers had more motivation to misrepresent income on a loan application in order to qualify for the bigger mortgage necessary to win the bidding war for a home,” says Mark Fleming, chief economist for First American, in a statement.
Part of the reason applicants are increasingly misrepresenting their income is because in this current housing market, where inventory is low and there is increased competition for homes, some buyers are looking to buy larger or more expensive homes and thus are trying to get larger loans.
“Throughout much of 2018, home prices were high, demand was rising and bidding wars were the new normal,” Fleming says “As a result of the competitive market, buyers were under more pressure to seek qualification for larger loans.”
The preponderance of fraud and misrepresentation will likely increase in the months to come, as home sales are forecast to increase.
“As affordability improves and demand increases going into the spring home-buying season, we expect the seller’s market conditions to return, potentially elevating income misrepresentation risk as well,” Fleming says.
Although the Defect Index increased month-over-month and year-over-year in February, it was still down 6.8% percent from the high point of risk in October 2013.
The Defect Index for refinance transactions increased by 3.6% compared with the previous month and was up 24.6% compared with a year earlier.
The Defect Index for purchase transactions increased by 4.2% compared with the previous month and was up 8.8% compared with a year earlier.