FirstAm Defects Index down from previous month but up year-over-year
The frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications decreased by 7% compared with the previous month.
According to First American’s Defect Index for June 2019, the risk of fraud and other issues was 3.9% higher than a year ago but more than 21% below the high point of risk in October 2013.
June’s defect index for refinance transactions decreased by 6.5% compared with the previous month but is up 4.3% compared with a year ago. The index for purchase transactions decreased by 7.8% compared with the previous month but is up 3.8% compared with a year ago.
“The Defect Index also measures loan application misrepresentation, defect and fraud risk over time in 50 of the largest markets in the U.S.,” said chief economist Mark Fleming. “Florida cities claimed four of the top six spots among the top cities where fraud risk declined the most on an annual basis: Jacksonville (-15.1%), Tampa (-11.5%), Orlando (-11.1%), and Miami (-7.3%). At the state level, Florida ranked second for the greatest year-over-year decline in fraud risk (-6.7%).”
Florida bucks its usual trend
Florida’s decline is not the norm as certain aspects of the state’s housing market – including a large share of investor-owned properties – tend to lead to a relatively higher risk.
“Indeed, according to the Defect Index in June 2019, applications for investment properties were 24% riskier than for owner-occupied properties, and applications for multi-unit properties, a popular purchase for investors, were 11% more likely to contain defects than applications for single-family homes,” noted Fleming.
He added that “Another possible explanation for why transactions involving investor-owned properties tend to carry greater fraud risk is that investors can claim they are purchasing a property as a second home (to capitalize on lower rates), when they actually plan to rent it out as an investment property. High levels of income misrepresentation and undisclosed mortgage debt have also been a reason for the particularly high levels of fraud risk concentrated in Florida,” he said.
Sellers’ market decline
Fleming said that there are several possible reasons for the decline in risk in Florida but the decline in the sellers’ market is reducing fraud risk in every market.
“As mortgage rates fall and the strong labor markets persists, potential home buyers feel less pressure to misrepresent information on a loan application,” said Fleming. “As the saying goes – a rising tide lifts all boats – and Florida is getting a bit of an extra lift this month.”
The five states with a year-over-year increase in defect frequency are: Nebraska (+34.8%), Iowa (+25.7%), New York (+25.3%), Pennsylvania (+19.7%), and Rhode Island (+19.1%).
The five states with a year-over-year decrease in defect frequency are: Arkansas (-10.3%), Florida (-6.7%), Vermont (-5.1%), Utah (-4.8%), and Arizona (-4.0%).
