The frequency of defects, fraud and misrepresentation in mortgage loan applications increased during December, according to First American’s latest Loan Application Defect Index.
While the frequency of defects, fraud and misrepresentation in the information submitted in mortgage loan applications held steady in December 2017 compared with November 2017, First American said it increased by 20.3 percent compared with December 2016.
The frequency of defects, fraud and misrepresentation in refinance mortgage loan applications in December was 21.1 percent higher than a year ago. First American said its index for December was down 18.6 percent from the high point of risk in October 2013.
“Last month, I noted that defect, fraud and misrepresentation risk had finally stabilized after a significant, seven-month-long rise,” First American Chief Economist Mark Fleming said in a release. “Much of the elevated risk can be attributed to an increase in the share of purchase mortgage transactions, which tend to carry more risk. It’s possible that all economists agree, a rarity, that mortgage rates will increase in 2018, which should increase the market share of purchase mortgage transactions, putting upward pressure on the overall risk of defect, fraud and misrepresentation.”
According to First American, the five states with the greatest year-over-year increase in defect frequency in December were South Dakota (+46.7 percent); New Mexico (+38.1 percent); Idaho (+31.6 percent); North Dakota (+31.1 percent); and Nebraska (+29.3 percent). Connecticut (-1.5 percent) was the only state with a year-over-year decrease in defect frequency.
The metropolitan areas with the greatest year-over-year increases in defect frequency in December were Virginia Beach (+39.7 percent); Orlando (+32.9 percent); Oklahoma City (+31.9 percent); Miami (+31.3 percent); and Las Vegas (+30.2 percent).
“Rising mortgage rates will reduce the consumer benefit of refinancing their existing loans, so the share of all mortgage transactions that are refinance transactions is expected to decline to 27 percent in 2018,” Fleming said. “We can look to the recent past for a glimpse at how defect risk will change as mortgage rates increase. Between January and September 2013 mortgage rates increased by 1.1 percent. Over that same time period, the overall level of risk in the Defect Index increased by 7.5 percent.”