Mortgage Application Defects Down–Except in Hurricane-Hit States

First American Financial Corp., Santa Ana, said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications fell in September, except in Florida and Texas, where post-hurricane activity led to a predictable bump in such activity.

The company’s Loan Application Defect Index for September fell by 1.2 percent from August–the first monthly drop this year–but jumped by 20.3 percent from a year ago. Historically, the Index is down 18.6 percent from the high point of risk in October 2013. The Defect Index for refinance transactions was unchanged from August but was 18.6 percent higher than a year ago. The Defect Index for purchase transactions decreased by 1.1 percent from August but increased by 12.5 percent from a year ago.

First American said prior to Hurricanes Harvey and Irma, defect risk in Florida and Texas had been declining, but that trend reversed in September, post-hurricane, with defect, fraud and misrepresentation risk has increased in Florida and Texas by 2.2 percent and 1.2 percent, respectively, compared to August.

“Unfortunately, historical data indicates that natural disasters and loan application defect risk go hand-in-hand,” said First American Chief Economist Mark Fleming. “Our defect, misrepresentation and fraud risk index identified signs of this risk trend in Texas and Florida this month and particularly in Houston, where risk increased the most among all the major markets we track.”

Fleming said Houston, which was severely impacted by flooding, saw defect, fraud and misrepresentation risk surge 7.2 percent in September, the largest month-over-month increase among the top 50 metropolitan markets. “Flooding is associated with elevated risk for misrepresentation of collateral risk condition,” he said.

Other report data:

–States with the greatest year-over-year increase in defect frequency: South Dakota (+54.2 percent), North Dakota (+45.7 percent), Wyoming (+40.3 percent), New Mexico (+40.0 percent) and Iowa (+39.3 percent). Only Connecticut (-2.8 percent) saw a year-over-year decrease in defect frequency.

Among largest metros, markets with greatest year-over-year increase in defect frequency were Raleigh, N.C. (+52.4 percent); Virginia Beach, Va. (+29.7 percent); Tampa, Fla. (+27.4 percent), Jacksonville, Fla. (+24.7 percent); and San Antonio (+24.6 percent). No metro areas reported a year-over-year decrease in defect frequency.