The Defect Index for purchase transactions in February rose by 4.2 from the previous month and increased by 8.8 percent from the previous year. The Defect Index for refinance transactions saw a 3.6 percent upswing from January and soared by 24.6 percent from one year ago.
“Throughout much of 2018, home prices were high, demand was rising and bidding wars were the new normal,” said Mark Fleming, Chief Economist at First American. “As a result of the competitive market, buyers were under more pressure to seek qualification for larger loans. Fraud can come in many forms, but income falsification remains one of the most likely misrepresentations.”
Fleming added that income-specific defect and fraud risk has been increasing since March 2018, although the February level was 57 percent lower than its peak in November 2012.
“The shift in the mix of loan applications toward more purchase applications and pressure on borrowers likely fed the 2018 increase in income-specific defects,” Fleming continued. “Between January 2018 and December 2018, interest rates increased 0.61 percentage points, while house prices continued to grow. Because of higher interest rates, refinancing activity slowed and the share of purchase loan applications compared with refinance loan applications increased. Purchase loan applications typically are more likely to have fraud than refinance transactions. Furthermore, in the strong seller’s market we experienced in 2018, borrowers had more motivation to misrepresent income on a loan application in order to qualify for the bigger mortgage necessary to win the bidding war for a home.”