January Loan Defect Index Unchanged, But High-Rise Condos a Concern

First American Financial Corp., Santa Ana, Calif., said its monthly Loan Application Defect Index held steady in January, but was nearly 14 percent higher than a year ago.

The report said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same in January and has fallen by nearly 19 percent from its high-water mark in October 2013. The Defect Index for refinance transactions remained unchanged compared to December and is nearly 17 percent higher than a year ago. The Defect Index for purchase transactions increased by 1.1 percent compared to December and is up nearly 11 percent from a year ago.

“While misrepresentation and manufacturing defects can happen on either purchase or refinance transactions, there is a greater propensity for fraud with purchase transactions,” said First American Chief Economist Mark Fleming. “The uptick in defect frequency in purchase transactions in January is an indication of heightened fraud risk.”

The report said states with the greatest year-over-year increase in defect frequency are South Dakota (+39.7 percent), New Mexico (+29.9 percent), Wyoming (+24.4 percent), Oregon (+23.9 percent) and Ohio (+23.1 percent). Only two states saw a year-over-year decrease in defect frequency: Connecticut (-4.3 percent) and Louisiana (-3.4 percent).

Among largest metros, markets with the greatest year-over-year increase in defect frequency are Oklahoma City (+29.6 percent), Virginia Beach, Va. (+26.9 percent), Miami (+25.3 percent), Orlando, Fla. (+24.7 percent) and Cleveland (+23.9 percent). Three markets saw a year-over-year decrease in defect frequency: Hartford, Conn. (-3.1 percent), Minneapolis (-2.6 percent), and Raleigh, N.C. (-2.5 percent).

“Florida is currently the third riskiest state according to the defect, fraud and misrepresentation risk index, and by far the largest state among the five most risky,” Fleming said. “While overall defect, fraud and misrepresentation risk in the U.S. has remained stable for five consecutive months, defect risk in Florida has been on the rise, increasing 6.5 percent since September 2017. This may be partly driven by the popularity of high-rise condominiums in Florida’s large coastal metropolitan areas. Condominiums are the only property type for which defect, fraud and misrepresentation risk has increased in the last three months, up 1.1 percent nationally.”