How Florence May Impact Mortgage App Defects

Mortgage loan defects increased by 1.3 percent month over month, and looking forward, how will Hurricane Florence impact defects? According to the First American Financial Solutions’ Loan Application Defect Index for August 2018, though the defect index is 1.3 percent higher over month, it fell by 8.3 percent year over year.

Additionally, the Defect Index is down 24.5 percent from the high point of risk in October 2013. Mark Fleming, Chief Economist at First American, discussed how the relatively flat index might be hit affected by Hurricane Florence.

“While the overall risk of loan application defects, fraud, and misrepresentation have been on the decline, there are regions with the potential for higher defect risk due to the impact from Hurricane Florence,” said Fleming. “The expected damage to housing is staggering. Based on the National Hurricane Center storm surge estimate, we expect that more than $13 billion worth of homes, according to estimates of current market value, are likely to be flooded with at least a foot of water. Nearly 80 percent of these homes are expected to be in North Carolina. In total, approximately 50,000 residential housing units may be damaged.”

“Unfortunately, on top of the damage to tens of thousands of homes, historical data indicates that hurricanes and loan application defect risk go hand-in-hand,” Fleming added. “Hurricanes, and especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition.”

Fleming notes that after Hurricane Sandy in late October 2012, mortgage defect, fraud and misrepresentation risk increased by 16.5 percent over four months in the New York metropolitan area. Likewise, Texas and Florida saw decreases in risk before Hurricanes Harvey and Irma, but after the storms the Defect Index experienced an 11.2 percent increase in Houston. According to Fleming, the Carolinas are likely to see a similar trend.

“While the devastating impacts from Hurricane Florence in the Carolinas continue to be assessed, it should come as no surprise that in the wake of major natural disasters, the risk of mortgage loan application fraud increases,” said Fleming. “According to the Defect Index, defect risk levels in the Carolinas were already trending up in recent months, and one should be on the lookout for further increases in risk in the markets impacted.”