The continuing shortage of housing inventory contributed to the rise in mortgage defect risk
A measure of mortgage loan application defects increased for the seventh consecutive month in June as the market deals with rising rates, a short supply, and a shift to more purchase mortgages.
The frequency of defects, fraud and misrepresentation in information submitted in mortgage loan applications rose 1.2% during the month from May, according to First American Financial’s Loan Application Defect Index for June. The index rose 16.7% compared to the June last year, but is down 17.6% from high point of risk in October 2013.
For refinance transactions, the defect index grew 2.9% from May and 16.7% from June 2016. The index for purchase transaction rose 1.1% from the May index and 13.8% from the same time in 2016.
“Following seven straight months of increases, the Loan Application Defect Index is now at the same level as almost two years ago in July 2015,” said Mark Fleming, chief economist at First American. “The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk. Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers’ markets in recent memory compounds the risk of an error on a loan application.”
First American also provided a list of the markets with are already risky but continue to see the fastest increases in risk. Based on the index data, Raleigh, N.C.; New Orleans; Tampa, Fla.; Birmingham, Ala.; and Charlotte, N.C., are the riskiest markets with the fastest increasing risk.
“Raleigh, N.C., is currently the riskiest market in the country, with a high level that is growing quickly. In fact, all of the markets in this list are in the South,” said Fleming. “Combining the levels of risk and rate of change rankings of loan application defect, fraud, and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk and the risk in these markets continues to grow at a strong pace.”
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Mortgage risk hits 2-year high
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The frequency of defects, fraud and misrepresentation in information submitted in mortgage loan applications rose 1.2% during the month from May, according to First American Financial’s Loan Application Defect Index for June. The index rose 16.7% compared to the June last year, but is down 17.6% from high point of risk in October 2013.
For refinance transactions, the defect index grew 2.9% from May and 16.7% from June 2016. The index for purchase transaction rose 1.1% from the May index and 13.8% from the same time in 2016.
“Following seven straight months of increases, the Loan Application Defect Index is now at the same level as almost two years ago in July 2015,” said Mark Fleming, chief economist at First American. “The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk. Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers’ markets in recent memory compounds the risk of an error on a loan application.”
First American also provided a list of the markets with are already risky but continue to see the fastest increases in risk. Based on the index data, Raleigh, N.C.; New Orleans; Tampa, Fla.; Birmingham, Ala.; and Charlotte, N.C., are the riskiest markets with the fastest increasing risk.
“Raleigh, N.C., is currently the riskiest market in the country, with a high level that is growing quickly. In fact, all of the markets in this list are in the South,” said Fleming. “Combining the levels of risk and rate of change rankings of loan application defect, fraud, and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk and the risk in these markets continues to grow at a strong pace.”
Related stories:
Mortgage risk hits 2-year high
Skilled labor shortage, higher development costs drive inventory slump
