Fraud/Misrepresentation Risk Rises 7th Straight Month

The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk, said First American Financial Corp., Santa Ana, Calif.

The company’s monthly Loan Application Defect Index said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 1.2 percent in June from May. From a year ago, the Defect Index increased by 16.7 percent but is down by nearly 18 percent from its high point of risk in October 2013.

First American said the Defect Index for refinance transactions increased by 2.9 percent month-over-month and by 16.7 percent from a year ago. The Defect Index for purchase transactions increased by 1.1 percent compared to last month and is by 13.8 percent from to a year ago.

“Following seven straight months of increases, the Loan Application Defect Index is now at the same level as almost two years ago in July 2015,” said Mark Fleming, chief economist with First American. “The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk. Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers’ markets in recent memory compounds the risk of an error on a loan application.”

The report said states with the greatest year-over-year increase in defect frequency were South Dakota (+66.7 percent), North Dakota (+52.2 percent), Wyoming (+46.3 percent), West Virginia (+37.9 percent) and North Carolina (+35.3 percent). No states saw a year-over-year decrease in defect frequency.

Among top metro areas, markets with the greatest year-over-year increase in defect frequency were Raleigh, N.C. (+49.2 percent); Charlotte, N.C. (+26.8 percent); New Orleans (+25.6 percent); Tampa, Fla. (+23.4 percent); and San Jose, Calif. (+23.3 percent). No top metro areas saw a decrease in defect frequency.

“Raleigh, N.C. is currently the riskiest market in the country, with a high level that is growing quickly,” Fleming said. “All of the markets in this list are in the South. Combining the levels of risk and rate of change rankings of loan application defect, fraud and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk and the risk in these markets continues to grow at a strong pace.”