Loan Application Defect Index at Two-Year High

First American Financial Corp., Santa Ana, Calif., said loan application defects, fraud and misrepresentation heated up in May to the highest levels in two years.

The company’s May Loan Application Defect Index increased by 2.5 percent from April and by 13.7 percent from a year ago. The Defect Index for refinance transactions increased by 3.0 percent month-over-month and by 9.7 percent from a year ago. The Defect Index for purchase transactions increased by 1.1 percent from April and by 11.1 percent from a year ago.

Mark Fleming“The Loan Application Defect Index is now reaching levels of risk not seen since 2015,” said Mark Fleming, chief economist with First American. “While risk is growing in both purchase and refinance transactions, it is important to recognize that loan application defect, fraud and misrepresentation risk remains below the peak reached in 2013. Purchase transaction risk is 13 percent below the peak and refinance transaction risk is 32 percent below the peak.

Fleming said the “purchase-pivot” in the housing market continues to add fuel to the fire of the overall level of application, defect and fraud risk.

McAllen, Texas had the highest Defect reading (106), followed by Charleston, S.C. (100), Birmingham, Ala. (98), Knoxville, Tenn. (98) and Augusta, Ga. (96).

“These hot spots for loan defect risk are getting hotter, as the risk in these markets is increasing significantly,” Fleming said. “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. Where there’s smoking demand, the flames of defect risk typically follow.”

The report said states with the greatest year-over-year increase in defect frequency were South Dakota (+56.4 percent), North Dakota (+50.0 percent), Wyoming (+40.9 percent), West Virginia (+35.6 percent) and Iowa (+34.4 percent). No states saw a year over year decrease.

Among largest metros, markets with the greatest year-over-year increase in defect frequency were Raleigh, N.C. (+39.4 percent); Tampa, Fla. (+21.8 percent); Buffalo, N.Y. (+21.3 percent); New Orleans (+20.5 percent); and Charlotte, N.C. (+19.2 percent). Only two markets saw a decrease in defect frequency: Oklahoma City (-4.7 percent) and Milwaukee (-1.3 percent).