The First American Loan Application Defect Index for October 2018, released on Monday, revealed an increase of 1.3 percent in the frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications, compared to the previous month.
However, it noted a decline of 4.8 percent in the Defect Index, compared to October 2017. The index also indicates a 22.5 percent fall from the high point of risk in October 2013.
"While the overall risk of loan application defects, fraud, and misrepresentation declined from a year-over-year perspective, there are regions with the potential for higher defect risk due to the impact from natural disasters," said Mark Fleming, Chief Economist at First American.
Fraud Risks and Natural Disasters
“Historical data indicates that natural disasters and loan application defect risk go hand-in-hand”, Fleming said. While losses from the wildfires in California continue to be assessed, Fleming indicated that the risk of mortgage loan application frauds in California and other affected markets is likely to see an increase in the months ahead. Los Angeles has trended down in recent months, according to Fleming. Wildfires in Northern California last year "gutted 6,800 homes and resulted in $12.6 billion in insured losses.
“The Defect Index in Los Angeles has trended down in recent months, while Oxnard has experienced a relatively flat trend in fraud risk following the post-Thomas Fire surge. Given historical trends, it’s fair to expect increases in defect and fraud risk in these affected markets in the near future,” Fleming said.
Speaking of the Camp Fires and Woolsey Fires in California, Fleming indicated that a higher estimate in losses may be expected since the damage from the recent wildfires greatly exceeded that of 2017. “Fraud and misrepresentation risk remained elevated for five months after the wildfire, before trending down again. Defect, fraud and misrepresentation risk in the Oxnard metropolitan area, which had been declining prior to the Thomas Fire, has yet to return to pre-wildfire levels,” he said.
Refinance and Purchase Transactions Index
Refinance transactions is up by 1.4 percent compared to the previous month and is up by 2.9 percent from last year. Purchase transactions increased by 2.5 percent compared to the previous month and fell by 8.9 percent compared with a year ago.
Top 5 State Highlights
Alaska (+16.9 percent), topped the charts in the year-over-year increase in defect frequency followed by Hawaii (+9.8 percent), California (+8.1 percent), Wyoming (+7.4 percent), and Maine (+6.9 percent), in October 2018.
Vermont (-22.9 percent) recorded the greatest year-over-year decrease in defect frequency for October 2018, with Vermont (-22.9 percent), Minnesota (-19.8 percent), Arkansas (-15.2 percent), Alabama (-14.7 percent), and Arizona (-14.3 percent), following the lead.
Top 5 Local Market Highlights
San Diego (+16.0 percent), Los Angeles (+12.5 percent), Memphis, Tennessee. (+10.5 percent), Buffalo, New York. (+10.4 percent), and Richmond, Virginia (+10.1 percent), reflected a year-over-year increase in defect frequency among the largest 50 Core Based Statistical Areas (CBSAs)
Minneapolis (-22.9 percent), led the charge in the largest year-over-year decrease in defect frequency followed by Birmingham, Alabama. (-17.3 percent), Columbus, Ohio (-15.1 percent), St. Louis (-14.6 percent), and Las Vegas (-14.5 percent) in the CBSAs.