Loan Defect Levels on the Rise

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased in January by 4.6 percent from the previous month and by 9.6 percent from one year earlier, according to the latest data released by the First American Loan Application Defect Index.

 

During January, the Defect Index for refinance transactions increased by 5.1 percent from December and spiked by 20.3 percent from January 2018. The Defect Index for purchase transactions rose by 5.6 percent compared with the previous month and was 3.3 percent higher from one year ago. West Virginia has the greatest year-over-year increase in defect frequency (37.5 percent), followed by Maine (35.8 percent), New York (35.5 percent), Nebraska (33.3 percent), and Alaska (30.7 percent), while Richmond, Va., had the highest metro market increase (33.8 percent).

 

“The overall rise in purchase and refinance applications, coupled with strong first-time home buyer demand and tight inventory, bodes well for an early spring home-buying season, but may contribute to further increases in defect risk,” said Mark Fleming, Chief Economist at First American. “Historically, purchase transactions tend to be more at risk of defects, fraud and misrepresentation, and the pressures resulting from rising demand and a strong sellers’ market compounds that risk. When home values are rising and the housing market is competitive, more buyers want to enter in the market. As a result, misrepresentation and fraud are more likely on a loan application.”

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