Fraud risk is rising in mortgage apps says First American

And there could be further increases in defects this spring

Fraud risk is rising in mortgage apps says First American

The current mortgage environment is facilitating a rise in mortgage application defects and fraud according to First American.

The title insurance and real estate risk solutions firm says that low rates are driving a rise in purchase and refinance applications, leading to greater potential for misrepresentations.

“Prospective home buyers and existing homeowners reacted to the lower rates, resulting in a mini-boom in mortgage applications, both purchase and refinance,” said Mark Fleming, First American’s chief economist. “In fact, according to the Mortgage Bankers Association, overall mortgage application volume increased 23.5% for the week ending on January 4, 2019. The decline in mortgage rates spurred a flurry of refinance activity, with refinance applications surging 35% week-to-week to their highest level since July 2018. Similarly, mortgage purchase applications jumped 17.”

Defect Index rises
The First American Loan Application Defect Index increased by 4.6% in January compared with the previous month and was 9.6% higher than in January 2018.

For purchase transactions, it increased by 5.6% from December and by 3.3% year-over-year. For refinances, it increased by 5.1% from December and by 20.3% year-over-year.

The last two months have seen a change from the usual rise in the Defect Index as the share of riskier purchase transactions increased with mortgages rates, while refinances decline. Despite rates declining in the last two months, both purchase and refinance transactions have increased.

Spring outlook
Demand for homes and tight inventory is lining up a buoyant spring housing market but Fleming says defects could also rise.

“When home values are rising and the housing market is competitive, more buyers want to enter in the market. As a result, misrepresentation and fraud are more likely on a loan application,” he said.