August Loan Application Defects Stable

First American Financial Corp., Santa Ana, Calif., said its Loan Application Defect Index held steady in August for the second straight month, but cautioned that Hurricanes Harvey, Irma and Maria could have a later impact.

The report said from a year ago, the Defect Index increased by 20.0 percent; it is down by 17.6 percent from the high point of risk in October 2013. The Defect Index for refinance transactions decreased by 1.4 percent month-over-month, but is 18.6 percent higher than a year ago. The Defect Index for purchase transactions remained unchanged from July but is up 15.2 percent compared to a year ago.

MarkFleming“It’s a positive sign that loan application risk has remained stable for two consecutive months, but given the recent high-profile data breaches that exposed the personal credit information of many U.S. consumers, the risk of identity-based fraud and misrepresentation is certainly elevated,” said First American Chief Economist Mark Fleming. He said the impact of Hurricanes Harvey and Irma on large parts of Texas and most of Florida continues to be assessed.

“Thankfully, recovery efforts are well underway and the rebuilding of homes has started,” Fleming said. “Yet, it should come as no surprise that in the wake of major natural disasters the risk of mortgage loan application fraud increases. Hurricanes, and particularly the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition. Evidence from monitoring application defect, misrepresentation and fraud risk after Sandy in the New York metropolitan area indicates that one should be on the lookout for increased risk in the markets impacted Harvey and Irma.”

Fleming noted in the aftermath of Hurricane Sandy in October 2012, mortgage fraud, misrepresentation and defect risk based on the Defect Index increased by 16.5 percent over four months in the New York metropolitan area. “The greater Houston and Tampa Bay markets were both significantly impacted by the recent hurricanes and will be markets to watch closely in the coming months for fraud and misrepresentation risk, especially related to collateral condition.”

First American reported states with the greatest year-over-year increase in defect frequency are South Dakota (+56.1 percent), Wyoming (+50.8 percent), North Dakota (+50.7 percent), North Carolina (+39.4 percent) and New Mexico (+39.1 percent). No state saw a year-over-year decrease in defect frequency.

Among the largest 50 metros, markets with the greatest year-over-year increase in defect frequency are Raleigh, N.C. (+54.0 percent); New Orleans (+32.4 percent); Tampa, Fla. (+25.7 percent), Las Vegas (+24.6 percent); and Oklahoma City (+24.3 percent). Only Houston saw a year-over-year decrease in defect frequency (-6.7 percent).