Risk Ticks Up for Resi Mortgage Defects

SANTA ANA, CA—The risk of loan defects for residential mortgages increased in March for the fourth consecutive month, First American Financial Corp. said Friday. The company's First American Loan Application Defect Index, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, rose 3.9% from the previous month.

The Defect Index for refinance transactions increased 3.3% month-over-month, and is 4.5% lower than a year ago, while the Defect Index for purchase transactions increased 2.4% compared to last month. It's up 3.6% from the year-ago period. That being said, First American notes that the Defect Index is down by 22.5% from the high point it reached in October 2013.

“This month, the Loan Application Defect Index continued to trend upward as the risk on refinance and purchase transactions both increased compared to a month ago,” says Mark Fleming, chief economist at First American. “After four consecutive months of increased defect risk, it's fair to call this a trend.”

Fleming points to “one of the strongest sellers' markets in recent memory.” In that context, he adds, “the 'speed-buying' that is required for home buyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation and fraud risk that we are observing.”

The risk of defect, fraud and misrepresentation increasingly is “a regional phenomenon,” Fleming says. “The risk is concentrating in attractive local markets where housing demand is the strongest,” primarily in the South.

Fleming notes that the five markets with the highest defect risk in the country are all Southern cities: McAllen, TX; Charleston, SC; Tampa, FL; Knoxville, TN; and Baton Rouge, LA. “The South may not be so charming anymore if you manage loan fraud and misrepresentation risk,” he adds

Conversely, Fleming notes that the Northeast has remained consistently low risk in this regard. With one exception—Toledo, OH—the housing markets with the lowest level of defect, fraud and misrepresentation risk in the country are in the Northeast, topped by Scranton, PA. Rounding out the top five are Rochester, NY; Albany, NY; and Harrisburg, PA.

SANTA ANA, CA—The risk of loan defects for residential mortgages increased in March for the fourth consecutive month, First American Financial Corp. said Friday. The company's First American Loan Application Defect Index, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, rose 3.9% from the previous month.

The Defect Index for refinance transactions increased 3.3% month-over-month, and is 4.5% lower than a year ago, while the Defect Index for purchase transactions increased 2.4% compared to last month. It's up 3.6% from the year-ago period. That being said, First American notes that the Defect Index is down by 22.5% from the high point it reached in October 2013.

“This month, the Loan Application Defect Index continued to trend upward as the risk on refinance and purchase transactions both increased compared to a month ago,” says Mark Fleming, chief economist at First American. “After four consecutive months of increased defect risk, it's fair to call this a trend.”

Fleming points to “one of the strongest sellers' markets in recent memory.” In that context, he adds, “the 'speed-buying' that is required for home buyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation and fraud risk that we are observing.”

The risk of defect, fraud and misrepresentation increasingly is “a regional phenomenon,” Fleming says. “The risk is concentrating in attractive local markets where housing demand is the strongest,” primarily in the South.

Fleming notes that the five markets with the highest defect risk in the country are all Southern cities: McAllen, TX; Charleston, SC; Tampa, FL; Knoxville, TN; and Baton Rouge, LA. “The South may not be so charming anymore if you manage loan fraud and misrepresentation risk,” he adds

Conversely, Fleming notes that the Northeast has remained consistently low risk in this regard. With one exception—Toledo, OH—the housing markets with the lowest level of defect, fraud and misrepresentation risk in the country are in the Northeast, topped by Scranton, PA. Rounding out the top five are Rochester, NY; Albany, NY; and Harrisburg, PA.