First American: Loan Defect Index Up 4th Straight Month
First American Financial Corp., Santa Ana, Calif., said its monthly Loan Application Defect Index rose for the fourth consecutive month in March, driven by a strong sellers’ market that has seen an increase in “speed-buying” in recent months.
The report said frequency of defects, fraudulence and misrepresentation in information submitted in mortgage loan applications increased by 3.9 percent in March from February. From a year ago, the Defect Index increased by nearly 4 percent.
While the Defect Index fell by 22.5 percent from its high point of risk in October 2013, the Index for refinance transactions increased by 3.3 percent month-over-month, although own by 4.5 percent lower than a year ago. The Defect Index for purchase transactions increased by 2.4 percent compared to February and rose by 3.6 percent from a year ago.
“After four consecutive months of increased defect risk, it’s fair to call this a trend,” said First American Chief Economist Mark Fleming. “We are experiencing one of the strongest sellers’ markets in recent memory and the ‘speed-buying’ that is required for home buyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation and fraud risk that we are observing.”
Fleming also noted defect, fraud and misrepresentation risk is increasingly becoming a regional phenomenon. “The risk is concentrating in attractive local markets where housing demand is the strongest, primarily in the South,” he said. “The South may not be so charming anymore if you manage loan fraud and misrepresentation risk. The riskiest markets are increasingly in the South, with elevated risk stretching from Texas to Florida and up to West Virginia,” said Fleming.
The report noted the five markets with the highest defect risk in the country are all based in the South: McAllen, Texas; Charleston, S.C.; Tampa, Fla.; Knoxville, Tenn.; and Baton Rouge, La. “The South is also one of the strongest regions of the country for housing demand,” Fleming said. “Additionally, the median price in the South was up 8.6 percent compared to a year ago.”
Conversely, the report said the Northeast has remained consistently low risk. Markets with the lowest level of defect, fraud and misrepresentation risk in the country are Scranton, Pa.; Toledo, Ohio; Rochester, N.Y.; Albany, N.Y.; and Harrisburg, Pa.
Other report highlights:
–States with the greatest year-over-year increase in defect frequency were Wyoming (+42.4 percent), South Dakota (+37.5 percent), North Dakota (+35.8 percent), Mississippi (+28.6 percent) and West Virginia (+26.8 percent).
–States with the greatest year-over-year decrease in defect frequency were Connecticut (-8.9 percent), Michigan (-6.1 percent), Oklahoma (-3.3 percent), Delaware (-3.0 percent) and Washington (-2.5 percent).
Among metro areas, markets with the greatest year-over-year increase in defect frequency were Raleigh, N.C. (+28.8 percent); New Orleans (+12.7 percent); Tampa, Fla. (+11.8 percent); Jacksonville, Fla. (+10.8 percent); and Minneapolis (+10.7 percent).
–Markets with the greatest year-over-year decrease in defect frequency were Milwaukee (-12.7 percent); Detroit (-12.6 percent); Oklahoma City (-9.2 percent); Louisville/Jefferson, Ky. (-8.8 percent); and Hartford, Conn. (-8.2 percent).
