Loan Defects on the Rise

July 31, 2017
The frequency of defects and fraud in mortgage applications remained unchanged between October and November
The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 1.2 percent from May to June, according to the latest First American Loan Application Defect Index report. On a year-over-year basis, the Defect Index shot up by 16.7 percent last month.
The Defect Index for refinance transactions in June increased 2.9 percent month-over-month, and was 16.7 percent higher than a year ago. The Defect Index for purchase transactions was 1.1 percent higher when compared to May and 13.8 percent higher compared to a year ago.
The five states with the greatest year-over-year increase in defect frequency in June were South Dakota (66.7 percent), North Dakota (52.2 percent), Wyoming (46.3 percent), West Virginia (37.9 percent) and North Carolina (35.3 percent). No state recorded a year-over-year decrease in defect frequency. Among the major metro areas, the five markets with the greatest year-over-year increase in defect frequency last month were Raleigh, N.C. (49.2 percent), Charlotte, N.C. (26.8 percent), New Orleans (25.6 percent), Tampa (23.4 percent) and San Jose (23.3 percent). No major metro saw a year-over-year decrease in defect frequency.
“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,” said Mark Fleming, Chief Economist at First American. “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.”