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Application Defect Rate Up Amidst Seller’s Market

The rate of defects, fraud, and misrepresentation in mortgage applications is up nearly 4 percent over February, according to the Loan Application Defect Index released by First American on Friday.

The Index, which estimates the frequency of defects in information submitted in mortgage applications, shows that defects, misrepresentation, and fraudulence rose 3.9 percent from February to March, as well as over the year. This was the fourth consecutive month the Defect Index has increased.

According to Mark Fleming, Chief Economist at First American, the inventory-strapped seller’s market is likely to blame for rising defects.

“We are experiencing one of the strongest sellers’ markets in recent memory,” Fleming said, “and the ‘speed-buying’ that is required for home buyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation, and fraud risk that we are observing.”

The Defect Index was up for the month on both refinance and purchase loans, rising 3.3 percent and 2.4 percent, respectively. Over the year, defects were down 4.5 percent on refinance transactions and up 3.6 percent on purchase ones.

Defects varied greatly at the local level. According to the report, the markets with the highest risk of defects were in the Southern part of the U.S., with the top five including McAllen, Texas; Charleston, South Carolina; Tampa, Florida; Knoxville, Tennessee; and Baton Rouge, Louisiana.

“Defect, fraud and misrepresentation risk is increasingly becoming a regional phenomenon,” Fleming said. “The risk is concentrating in attractive local markets where housing demand is the strongest, primarily in the South,” said Fleming. “The South may not be so charming anymore if you manage loan fraud and misrepresentation risk.”

According to Fleming, this falls in line with the “seller’s market” causation theory.

“The South is also one of the strongest regions of the country for housing demand,” Fleming said. “According to the most recent National Association of Realtors’ existing-home sales release, the rate of existing-home sales increased 8.5 percent in March compared to a year ago. Additionally, the median price in the South was up 8.6 percent compared to a year ago.”

Markets in the Northeastern part of the country have a much lower rate of defect. Scranton, Pennsylvania; Toledo, Ohio; Rochester, New York; Albany, New York; and Harrisburg, Pennsylvania, had the lowest levels of defect and fraud in the nation.




About Author: Aly J. Yale

Aly J. Yale is a longtime writer and editor from Texas. Her resume boasts positions with The Dallas Morning News, NBC, PBS, and various other regional and national publications. She has also worked with both the Five Star Institute and REO Red Book, as well as various other mortgage industry clients on content strategy, blogging, marketing, and more.

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