Risks of Mortgage Loan Defects Dropping

First American Financial Corporation reported that the frequency of defects, fraud, and misrepresentation in mortgage loan applications fell 7% month-over-month in June. 

June’s report represents a 3.9% year-over-year decline, and the Defect Index is down 21.6% from its peak of 21.6% in October 2013.

“The Defect Index for refinance transactions also fell 6.5% compared with the previous month. The overall Defect Index, which includes both purchase and refinance transactions, fell 7.0% compared with last month, but remains 3.9 percent higher than one year ago,” said First American Chief Economist Mark Fleming. “Yet, is declining loan application misrepresentation, defect and fraud risk isolated to a few markets, or is the trend more geographically broad based?” 

Florida markets claimed four of the top six spots among cities where fraud risk decline the most. Jacksonville led the way with a drop of 15.1%, and was followed by Tampa (-11.5%), Orlando (-11.1%), and Miami (-7.3%). Florida recorded the second highest year-over-year decline in fraud risk, seeing the number fall by 6.7%. 

“This is a deviation from the norm, as Florida has historically exhibited a relatively greater concentration of fraud risk due to some characteristics of the Florida housing market,” Fleming said. “Florida tends to have a higher percentage of investor-owned properties, which have a higher propensity for fraud risk. Indeed, according to the Defect Index in June 2019, applications for investment properties were 24% riskier than for owner-occupied properties, and applications for multi-unit properties, a popular purchase for investors, were 11% more likely to contain defects than applications for single-family homes.”

Nebraska had the nation’s highest increase in decrease frequency at 34.8%. New York was a close second at 25.3%, followed by Pennsylvania at 19.7% and Rhode Island at 19.1%. 

Joining in Florida among the states with decreases are Arkansas (10.3%), Vermont (5.1%), Utah (4.8%), and Arizona (4%). 

Buffalo, New York, saw the highest increase in defect risk at 31.1%. Houston, Texas, saw the largest drop in defect risk at 16.7%.