The First American Loan Application Defect Index, which estimates the frequency of defects in the information submitted in mortgage loan applications, fell 2.4 percent in August as compared with July and decreased by 8.9 percent as compared with August 2014. The Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type, is down 19.6 percent from the high point of risk in October 2013.
“While nationally, defect risk has been increasing throughout the homebuying season, this month’s index moved counter-trend toward less risk. Purchase, investor, adjustable-rate and non-single-family transaction types are all more risky than their category alternatives. Defect risk continues to be concentrated in markets in Texas, Florida and Michigan,” First American Chief Economist Mark Fleming said. “Nonetheless, given the increasing number of homes lost to wildfires in California, we are monitoring these natural disaster impacted markets closely for any increase in fraud-related defect risk.”
Even though there was a slight improvement this month, overall the Defect Index has been trending consistently toward increased risk since the series low point in March 2015. The index is up 5 percent from the trough, yet remains well below the level of defect risk observed throughout most of the historical series. Whether this month’s improvement is the reversal of the trend toward increased risk will be determined in the coming months.
The Defect Index for refinance transactions had no change month-over-month, and is now 10 percent lower than a year ago. The Defect Index for purchase transactions improved 3.3 percent month-over-month, and is down 7.4 percent compared with a year ago. Since the peak in late 2013 of both purchase and refinance transactions, defect risk on refinance transactions has decreased much more than defect risk for purchase transactions, declining 28 percent compared with 15.4 percent for purchase transactions.
Local market highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest month-over-month increase in defect frequency are: Oklahoma City, Okla., (+3.2 percent); Austin, Texas, (+2.9 percent); Houston (+2.0 percent); San Jose, Calif., (+1.4 percent) and Louisville, Ky., (+1.2 percent).
- Among the largest 50 CBSAs, the five markets with the highest month-over-month decrease in defect frequency are: Boston (-6.8 percent); Nashville, Tenn., (-4.7 percent); New Orleans (-4.2 percent); Memphis, Tenn., (-3.8 percent) and New York (-3.6 percent).
Market close up: Fraudulent wildfire lending in California
Currently, California as a whole has defect risk below the national average. In fact, Stockton was the only market in California with defect risk above the national average in August. However, as wildfires continue to burn in California and the number of homes destroyed continues to grow, the risk of fraudulent defects increases in the impacted areas. Historically, natural disasters increase the risk of collateral-related fraud schemes, as damaged or completely destroyed properties are refinanced or sold to straw buyers, and lenders are left with properties of little or no worth.
“Because the opportunity for collateral-based fraud schemes increases after a natural disaster, we are turning our attention to wildfire impacted areas in the west, and California in particular. We’ve learned from natural disasters, such as Hurricanes Katrina and Sandy, that the incentive and opportunity to conduct mortgage fraud increases when property is damaged and destroyed,” Fleming said. “Given the large number of homes impacted by wildfires this year, we will monitor this particularly costly form of mortgage defect closely in the next few months.”