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The May 2017 Index reveals an increase in frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications by 2.5 percent, compared to April 2017.
According to a report by First American, the index estimates the level of defects in submitted mortgage loan applications processed by the First American’s FraudGuard system. The findings are determined based on the frequency that defect indicators are identified. The Defect Index moves higher as greater numbers of defect indicators are found—increases representing a rising level of loan application defects.
The Defect Index increased by 13.7 percent since last year. Refinance transactions increased by 3 percent month-over-month with a 9.7 percent increase and purchase transactions rose 11.1 percent in the same time frame.
Mark Fleming, First American’s Chief Economist said the Loan Application Defect Index is now reaching levels of risk not seen since 2015.
“While risk is growing in both purchase and refinance transactions,” Fleming said, “it’s important to recognize that loan application defect, fraud, and misrepresentation risk remains below the peak reached in 2013.”
Fleming said the purchase transaction risk is 13 percent below the peak and refinance transaction risk is 32 percent below.
"The purchase-pivot in the housing market continues to add fuel to the fire of the overall level of application, defect, and fraud risk," Fleming said.
According to Fleming, this Loan Application Defect Risk is creating a “heat wave” that is destroying several Southern markets.
McAllen, Texas ranked first followed by Charleston, South Carolina; Birmingham, Alabama; Knoxville, Tennessee; and Augusta, Georgia. Fleming calls these cities “hot spots” for loan defect risk getting “hotter,” as the risk in these markets is increasing significantly.
The defect risk in each market has increased by a minimum of 10 percent in the past year, and southern markets are experiencing some of the strongest growth in housing demand as people seek the lower cost of living compared to northeastern and western markets, according to Fleming.
“Where there's smoking demand, the flames of defect risk typically follow," Fleming said.
According to First American, the next release of the Loan Application Defect Index will be posted the week of July 24, 2017.
