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A Storm of Defects

The effect of the recent hurricane season is being felt on mortgage loan applications too. According to the First American [1] Loan Application Defect Index for September 2018 the frequency of defects, fraudulence, and misrepresentation in mortgage loan applications rose 1.3 percent compared with August 2018.

The rise, said Mark Fleming, Chief Economist, First American, was prompted by Hurricane Florence. "Hurricanes, especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral conditions and identity fraud in mortgage applications," Fleming said.

The index [2] reflects this trend. While the index saw a steady decrease since the beginning of 2018, the last two months have seen a surge in defect risk that increased 2.6 percent from August 1 to September 30, according to First American's data, with preliminary defect spikes being seen in North and South Carolina—both states affected by Hurricane Florence.

Worst-case projections on the destruction of Hurricane Florence, estimate losses from flooding at $28.5 billion and and an additional $1.5 billion in wind damage. "North and South Carolina experienced nearly identical monthly increases in the Defect Index in September, 5.3 percent and 5.2 percent respectively," Fleming said. "The rise in defect risk is more pronounced when comparing with three months ago, as North and South Carolina experienced 6.6 percent and 9.7 percent respective increases in defect risk."

Additionally, according to Fleming, Hurricane Florence does not mark the end of the damages from the hurricane season this year. "Using data from DataTree by First American [3] and the National Hurricane Center [4], we estimate that Hurricane Michael, the strongest hurricane on record to hit Florida, will impact $125 billion of residential real estate in the state," he said.

Using the defect data from 2017, Fleming projected what lies ahead for mortgage application defect risks. He said that looking at data after Hurricanes Irma and Maria that hit Florida in 2017, defects in Florida increased 10 percent through December 2017. This could repeat in 2018 too. "The good news is that defect risk spikes due to natural disasters tend to stabilize given time," Fleming said. "In the case of Hurricane Irma, defect risk in Florida took approximately three months to stabilize, while defect risk in the New York metropolitan area took almost a full year before defect, fraud and misrepresentation risk returned to pre-Hurricane Sandy levels."