Defect Frequency in Mortgage Apps on the Rise

The frequency of defect, fraud, and misrepresentation in information submitted during the mortgage application process has increased over the past year according to the First American Loan Application Defect Index released by First American for the month of January 2018.

The index, which reflects estimated mortgage loan defect rates over time, by geography, and loan type, increased by 13.7 percent in January 2018 compared to the same period last year. On a month over month basis, the index remained unchanged and was down 18.6 percent from its high point of risk in October 2013.

First American also estimates the risk of defect in refinance and purchase transactions through this index. While the defect index for refinance remained unchanged, for purchase transactions it increased by 1.1 percent in January 2018 compared to December 2017. On a year-over-year basis, the defect index for purchase transactions rose 10.8 percent.

“The overall defect, fraud, and misrepresentation risk index remained unchanged, however, the index for purchase transactions increased in January,” said Mark Fleming, Chief Economist at First American. “While misrepresentation and manufacturing defects can happen on either purchase or refinance transactions, there is a greater propensity for fraud with purchase transactions.”

When looked at a state-level, defect risks were rising rapidly in Florida, increasing 6.5 percent since September 2017. According to Fleming, this was because the high-rise condominiums along the Florida coast were home to the highest risk of loan application defects, frauds, and representation. “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. The other states in the top five are Arkansas, Idaho, Wyoming, and North Dakota,” Fleming said.

At a 39.7 percent year-over-year increase in defect frequency, South Dakota led the states with the most increase in defect frequency. South Dakota was followed by New Mexico where defect frequency increased 29.9 percent, Wyoming (24.4 percent), Oregon (23.9 percent), and Ohio (23.1 percent).