The overall risk of loan defects is rising, according to First American’s Loan Application Defect Index released today. June marked the seventh straight month the risk has increased.
According to the Index, the frequency of defects, misrepresentation, and fraudulence on mortgage loan applications rose 1.2 percent in June and 16.7 percent over the year.
Broken down by loan type, defects on refinance loans jumped 2.9 percent for the month and 16.7 percent for the year, while defects on purchase loans rose 1.1 percent and 13.8 percent, respectively.
According to Mark Fleming, Chief Economist at First American, the rise is due to higher mortgage rates and low inventory.
“Following seven straight months of increases, the Loan Application Defect Index is now at the same level as almost two years ago in July 2015,” Fleming said. “The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk. Purchase transactions are inherently more at risk of defects, fraud, and misrepresentation, and the pressures resulting from one of the strongest sellers’ markets in recent memory compounds the risk of an error on a loan application.”
The Index also ranked the country’s riskiest markets in terms of loan defects. Raleigh, North Carolina, came in at No. 1, with a 49.2 percent year-over-year increase. New Orleans (up 25.6 percent); Tampa, Florida (up 23.4 percent); Birmingham, Alabama (up 20.1 percent); and Charlotte, North Carolina, (up 26.8 percent) rounded out the top five.
“Raleigh, North Carolina, is currently the riskiest market in the country, with a high level that is growing quickly,” Fleming said. “In fact, all of the markets in this list are in the South. Combining the levels of risk and rate of change rankings of loan application defect, fraud, and misrepresentation risk reveals that major markets in North Carolina and Florida are high-risk, and the risk in these markets continues to grow at a strong pace.”
The top states for defect risk were South Dakota, North Dakota, Wyoming, West Virginia, and North Carolina. The defect frequency in South Dakota has jumped 66.7 percent in the last year.
See the full Index at FirstAm.com.