Loan Defect Index Flat in August As Hurricane Damage Looms

In the wake of major natural disasters this summer, the risk of mortgage loan application fraud increased in August, said First American Financial Corp., Irvine, Calif.

The report said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 1.3 percent in August compared to July. From a year ago, the Defect Index decreased by 8.3 percent.

First American said the Defect Index is down 24.5 percent from the high point of risk in October 2013.

The report said the Defect Index for refinance transactions was unchanged in August from July and is 1.4 percent lower than a year ago. The Defect Index for purchase transactions also remained unchanged compared and is down 13.2 percent compared to a year ago.

“Unfortunately, on top of the damage to tens of thousands of homes, historical data indicates that hurricanes and loan application defect risk go hand-in-hand,” said First American Chief Economist Fleming. “Hurricanes, and especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition.”

Fleming noted while the overall risk of loan application defects, fraud and misrepresentation have been on the decline, there are regions with the potential for higher defect risk due to the impact from Hurricane Florence.

“The expected damage to housing is staggering,” Fleming said. “Based on the National Hurricane Center storm surge estimate, we expect that more than $13 billion worth of homes, according to estimates of current market value, are likely to be flooded with at least a foot of water. Nearly 80 percent of these homes are expected to be in North Carolina. In total, approximately 50,000 residential housing units may be damaged.”

Fleming warned fraud risk in the Carolinas is likely to increase in the months ahead. “While the devastating impacts from Hurricane Florence in the Carolinas continue to be assessed, it should come as no surprise that in the wake of major natural disasters, the risk of mortgage loan application fraud increases,” he said. “According to the Defect Index, defect risk levels in the Carolinas were already trending up in recent months, and one should be on the lookout for further increases in risk in the markets impacted.”

The report said three states reported a year-over-year increase in defect frequency: Hawaii (+6.5 percent), Maine (+4.2 percent) and California (+1.3 percent). States with the greatest year-over-year decrease in defect frequency were South Carolina (-21.9 percent), Minnesota (-20.7 percent), Vermont (-19.2 percent), Arkansas (-17.9 percent) and North Dakota (-17.8 percent).

Among the largest 50 top metros, markets with the greatest year-over-year increase in defect frequency were Virginia Beach, Va. (+14.1 percent), Los Angeles (+11.0 percent), Orlando, Fla. (+11.0 percent), San Diego (+6.3 percent), and Houston (+6.0 percent). Metros with the largest year-over-year decrease in defect frequency were Raleigh, N.C. (-23.7 percent), Minneapolis (-23.5 percent), Birmingham, Ala. (-21.4 percent), St. Louis (-18.9 percent) and Boston (-17.6 percent).