First American: Defect Risk Increases For Seventh Consecutive Month

Posted by Lauren Tyler on July 31, 2017 No Comments
Categories : Residential Mortgage

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 1.2% in June 2017 as compared with the previous month, according to First American’s Loan Application Defect Index.

Compared to June 2016, the Defect Index increased by 16.7%, First American says.

Still, the overall risk of defects was down 17.6% from the high point of risk in October 2013.

The risk of defects in applications for refinances increased 2.9% month-over-month and is 16.7% higher than a year ago.

The risk of defects in applications for purchase transactions increased 1.1% compared to last month and is up 13.8% compared to a year ago.

“Following seven straight months of increases, the Loan Application Defect Index is now at the same level as almost two years ago in July 2015,” says Mark Fleming, chief economist at First American. “The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk. Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers’ markets in recent memory compounds the risk of an error on a loan application.”

“We often look at the level of risk or the magnitude of change in risk over a particular time, but less often the combination of the two,” continues Fleming. “For example, the five markets with the greatest increase in defect frequency are Raleigh, N.C.; Charlotte, N.C.; New Orleans; Tampa, Fla.; and San Jose, Calif. According to Defect Index data, the markets with the highest levels of risk are currently Birmingham, Ala.; New Orleans; Raleigh, N.C.; Miami; and Tampa, Fla. By cross-referencing these two lists, high risk levels and fastest rising risk, we can identify the five riskiest markets with the fastest increasing risk.”

“Raleigh, N.C., is currently the riskiest market in the country, with a high level that is growing quickly. In fact, all of the markets in this list are in the South,” says Fleming. “Combining the levels of risk and rate of change rankings of loan application defect, fraud, and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk, and the risk in these markets continues to grow at a strong pace.”

For more, including a breakdown of fraud risk by state, click here.

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