An estimate of mortgage fraud, defects, and misrepresentations has halted its declining trend seen since the start of 2018.
The First American Loan Application Defect Index for August 2018 shows that the frequency of defects, fraudulence, and misrepresentation in mortgage applications was up 1.3% compared to July although fell 8.3% year-over-year.
The purchase component of the index recorded the largest year-over-year decline.
“Following seven straight months of declining defect risk, the Loan Application Defect Index for purchase transactions remained the same in August compared with the month before. Year over year, the Defect Index for purchase transactions decreased 13.2% as compared to August 2017,” said Mark Fleming, chief economist at First American. “The Defect Index for refinance transactions is the same as the previous month and is 1.4% lower than a year ago.”
Hurricane Florence increased risk
Fleming added that risk in some regions has increased following Hurricane Florence with estimated damage in around $13 billion worth of homes, some 50,000 residential units.
“Unfortunately, on top of the damage to tens of thousands of homes, historical data indicates that hurricanes and loan application defect risk go hand-in-hand,” said Fleming. “Hurricanes, and especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition.
Following Hurricanes Harvey and Irma, First American’s index – which had been declining – saw an increase of 11.2% over 3 months.
“According to the Defect Index, defect risk levels in the Carolinas were already trending up in recent months, and one should be on the lookout for further increases in risk in the markets impacted,” added Fleming.
Three states have a year-over-year increase in defect frequency: Hawaii (+6.5%), Maine (+4.2%), and California (+1.3%) while the five states with the greatest year-over-year decrease in defect frequency are: South Carolina (-21.9%), Minnesota (-20.7%), Vermont (-19.2%), Arkansas (-17.9%), and North Dakota (-17.8%).