First American: June Application Defects Drop 7%

First American Financial Corp., Santa Ana, Calif., said frequency of defects, fraudulence and misrepresentation in information submitted in mortgage loan applications decreased by 7.0 percent in June from May. From a year ago, the index increased by nearly 4 percent.

First American said the Defect Index for refinance transactions decreased by 6.5 percent from May but rose by 4.3 percent from a year ago. The Defect Index for purchase transactions decreased by 7.8 percent from May but rose by 3.8 percent from a year ago.

The Index is down by 21.6 percent from the high point of risk in October 2013.

Significantly, the report said, Florida cities–traditionally a hot point for mortgage application fraud–saw significant decreases in June. Florida cities claimed four of the top six spots among the top cities where fraud risk declined the most on an annual basis: Jacksonville (-15.1 percent), Tampa (-11.5 percent), Orlando (-11.1 percent) and Miami (-7.3 percent). At the state level, Florida ranked second for the greatest year-over-year decline in fraud risk (-6.7 percent).

“This is a deviation from the norm, as Florida has historically exhibited a relatively greater concentration of fraud risk due to some characteristics of the Florida housing market,” said First American Chief Economist Mark Fleming. “Florida tends to have a higher percentage of investor-owned properties, which have a higher propensity for fraud risk. Indeed, according to the Defect Index in June 2019, applications for investment properties were 24 percent riskier than for owner-occupied properties, and applications for multi-unit properties, a popular purchase for investors, were 11 percent more likely to contain defects than applications for single-family homes.

Fleming noted another possible explanation for why transactions involving investor-owned properties tend to carry greater fraud risk is that investors can claim they are purchasing a property as a second home (to capitalize on lower rates), when they actually plan to rent it out as an investment property,” he said. “High levels of income misrepresentation and undisclosed mortgage debt have also been a reason for the particularly high levels of fraud risk concentrated in Florida.”

Additionally, Fleming said, the number of condo existing-home sales has fallen in Miami, Orlando and Tampa compared to last year. Statewide, condo existing-home sales in Florida have fallen nearly 14 percent compared with one year ago, which is counter to the national trend. “Loan applications for condos and multi-family properties have historically been riskier than single-family properties, so fewer condo and multi-family transactions may help explain the decline in fraud risk in Florida,” he said.

The report said states with a year-over-year increase in defect frequency were Nebraska (34.8 percent), Iowa (25.7 percent), New York (25.3 percent), Pennsylvania (19.7 percent) and Rhode Island (19.1 percent). States with a year-over-year decrease in defect frequency were Arkansas (-10.3 percent), Florida (-6.7 percent), Vermont (-5.1 percent), Utah (-4.8 percent) and Arizona (-4.0 percent).

Among the largest 50 metros, markets with the greatest year-over-year increase in defect frequency were Buffalo, N.Y. (31.1 percent), Pittsburgh (25.9 percent), New York (16.9 percent), New Orleans (16.9 percent) and San Jose, Calif. (14.5 percent). Markets with year-over-year decrease in defect frequency were Houston (-16.7 percent), Jacksonville, Fla. (-15.9 percent), San Diego (-15.1 percent), Tampa, Fla. (-11.5 percent) and Orlando, Fla. (-11.1 percent).