Loan Defect Index Holds Steady
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Loan Defect Index Holds Steady

September 26, 2018
The frequency of defects, fraudulence and misrepresentation in mortgage loan applications was up last month by 1.3 percent from July and down 8.3 percent from one year ago, according to data from First American Financial Corp.
The frequency of defects, fraudulence and misrepresentation in mortgage loan applications was up last month by 1.3 percent from July and down 8.3 percent from one year ago, according to data from First American Financial Corp.
 
First American’s Loan Application Defect Index for refinance transactions was unchanged from July to August and down 1.4 percent from August 2017. The Defect Index for purchase transactions was also unchanged from July and down 13.2 percent compared with a year ago.
 
Mark Fleming, First American’s Chief Economist, warned that the defect index could rise in the aftermath of 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.”
 
Fleming added that “historical data indicates that hurricanes and loan application defect risk go hand-in-hand. Hurricanes, and especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition.
 
In the aftermath of Hurricane Sandy in late October 2012, mortgage defect, fraud and misrepresentation risk, as measured by the Defect Index, increased 16.5 percent over four months in the New York metropolitan area. Fraud and misrepresentation risk remained elevated for an entire year after the hurricane, before returning to a level consistent with the national index in late 2013.
 
“Similarly, before Hurricanes Harvey and Irma hit, mortgage risk in Texas and Florida was decreasing. However, following the storms, the trend reversed course in September 2017,” said Fleming. “Due to flooding in Houston, the Defect Index experienced an 11.2 percent increase in mortgage defect, fraud and misrepresentation risk over three months.”  

 
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