In December, defect risk continued to rise across the country, according to the latest First American Loan Application Defect Index.
According to the report, the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications climbed 7.4% from the previous month, increasing 4.8% from December 2017.
Nationally, the Defect Index for refinance transactions moved forward 8.2% from November and is up a whopping 14.5% from the same time a year ago. Notably, the Defect Index for purchase transactions rose 7.1% from November but remains 1.1% down from 2017.
The fourth quarter of 2018 saw loan application defect risk rise significantly. “Overall defect risk reached its highest point in more than four years,” First American Chief Economist Mark Fleming said. “In December, defect risk increased in every state compared with the previous month, and defect risk increased in 39 states year over year.”
According to Fleming, the trend can be attributed to two significant factors: the rising share of purchase transactions and natural disasters. Fleming explains that while mortgage rates were consistently below 4% in 2017, rates steadily rose in 2018, reaching a high of 4.8% in October.
“As mortgage rates rise, the incentive to refinance declines,” said Fleming. Refinance mortgage transactions dropped to 27% of the overall mortgage market in the fourth quarter of 2018, 10% lower than the previous year. While loan application defects can happen on either purchase or refinance transactions, Fleming states “there is a greater propensity for fraud and misrepresentation with purchase transactions.”
The research also indicates that natural disasters go hand-in-hand with loan application defect risk. This creates the opportunity for misrepresentation of collateral condition, which Fleming said is happening in the aftermath of the 2018 California wildfires. “Before July, defect, fraud and misrepresentation risk was declining in California,” he said. “Since July, California’s defect risk has steadily increased.”
As of December, California fraud risk now sits 14.5% higher than one year ago, and 6% higher than November, according to Fleming.