Purchase loan application defect risk increased in January

The overall loan defect risk remained unchanged in January compared to the previous month, but it increased for purchase transactions

By Steve Randall

01 Mar 2018

The overall loan defect risk remained unchanged in January compared to the previous month, but it increased for purchase transactions.

First American says that its Loan Application Defect Index; which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications; has been stable for 5 months but was up 13.7% year-over-year in January.

For refinance transactions, the index was unchanged from December but up 16.9% year-over-year; while for purchase transactions it was up 1.1% month-over-month and up 10.8% year-over-year.

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

Florida’s high risk is getting higher

“As the risk of fraudulent purchase transactions rises, understanding where risk lies is important,” said Fleming. “Florida is one of the largest markets in the country with concentrations of condominiums in the large coastal markets. The combination of size and rising defect, fraud, and misrepresentation risk in condominiums, makes Florida an important market to watch.”

“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,” he added.

Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are: Oklahoma City (+29.6%), Virginia Beach, Va. (+26.9%), Miami (+25.3%), Orlando, Fla. (+24.7%), and Cleveland (+23.9%).

The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+39.7%), New Mexico (+29.9%), Wyoming (+24.4%), Oregon (+23.9%) and Ohio (+23.1%).