The frequency of defects, fraud and misrepresentation in mortgage loan applications in February increased by 4.4 percent compared with the previous month, according to the First American Loan Application Defect Index.
Year-over-year, the index increased by 14.5 percent, but remained down 6.8 percent from the high point of risk in October 2013.
“Throughout much of 2018, home prices were high, demand was rising and bidding wars were the new normal. As a result of the competitive market, buyers were under more pressure to seek qualification for larger loans,” First American Chief Economist Mark Fleming said in a release.
“Fraud can come in many forms, but income falsification remains one of the most likely misrepresentations,” Fleming added. “By December 2018, income-specific loan risk had increased 12 percent compared with one year ago. However, income risk has remained flat in 2019, begging the question, what drives income misrepresentation?”
Fleming said the shift in the mix of loan applications toward more purchase applications (and away from refinances) and pressure on borrowers is likely feeding an increase in income-specific defects.
“Purchase loan applications typically are more likely to have fraud than refinance transactions,” Fleming said. “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.”
According to the index, defects for refinance transactions increased by 3.6 percent compared with the previous month, and are up 24.6 percent compared with a year ago. Defects for purchase transactions increased by 4.2 percent compared with the previous month, and are up 8.8 percent compared with a year ago.
The index identified the five states with the greatest year-over-year increases in defect frequency in February as Maine (+42.2 percent); New York (+42.1 percent); West Virginia (+38.7 percent); Nebraska (+37.8 percent), and Iowa (+37.0 percent). The two states with the greatest year-over-year decreases in defect frequency in February were Arkansas (-1.9 percent) and Florida (-1.0 percent).