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Loan Application Defect Risk Surges

UnderwritingThe latest First American Loan Application Defect Index revealed a 7.4 percent increase in the frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications in December 2018 compared to the month prior.

Two recent trends—the rising share of purchase transactions and the impact of natural disasters— drove the late 2018 rise in defect risk, according to Mark Fleming, Chief Economist at First American.

Fleming noted that while loan application defects can happen on either purchase or refinance transactions, there is a greater propensity for fraud and misrepresentation with purchase transactions.

“Our research indicates that natural disasters go hand-in-hand with loan application defect risk, as natural disasters create the opportunity for misrepresentation of collateral condition. Unfortunately, this trend appears to be playing out in the aftermath of the tragic wildfires that struck California in late 2018,” said Fleming. “Before July, defect, fraud and misrepresentation risk was declining in California. Since July, California’s defect risk has steadily increased. In California, fraud risk was 14.5 percent higher than one year ago and 6 percent higher than November,” Fleming said.

The December 2018 Index, compared to 2017 recorded an increase of 4.8 percent. However, this is also a drop in the index by 14.7 percent from the high point of risk in October 2013, the report found. Refinance transactions increased by 8.2 percent compared to the previous month—up by 14.5 percent compared with a year ago. Purchase transactions went up by 7.1 percent compared with the previous month, down 1.1 percent compared with a year ago. The share of refinance mortgage transactions dropped to 27 percent of the overall mortgage market in the fourth quarter of 2018, 10 percent lower than the previous year.

Fleming also pointed out that Q4 2018 saw loan application defect risk rise significantly, with overall defect risk reached its highest point in more than four years nationally. 

Alaska (+32.9 percent), West Virginia (+31.5 percent), Maine (+26.1 percent), New York (+24.7 percent), and Hawaii (+21.1 percent) are the five states that recorded a year-over-year increase in defect frequency.

If mortgage rates continue to trend up into 2019, a corresponding increase in the share of ARMs could help offset the rise in risk from the increasing share of purchase transactions, Fleming noted. “Additionally, data from the 2017 Thomas Fire in California shows that defect risk remained elevated for five months after the wildfire, before trending down again. If this historical trend continues, we expect defect risk in California to normalize moving forward,” he added.

Fleming is optimistic about 2019 market. He indicated that while the rise in mortgage rates and the tragic natural disasters of 2018 elevated loan application defect risk, there is a reason to believe that this will stabilize in 2019. 


About Author: Donna Joseph

Donna Joseph is a Dallas-based writer who covers technology, HR best practices, and a mix of lifestyle topics. She is a seasoned PR professional with an extensive background in content creation and corporate communications. Joseph holds a B.A. in Sociology and M.A. in Mass Communication, both from the University of Bangalore, India. She is currently working on two books, both dealing with women-centric issues prevalent in oppressive as well as progressive societies. She can be reached at donna.joseph@thefivestar.com.

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