Mortgage defects index lower but there are risks ahead

October brought another decline in the estimated frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications.

There was a 1.3% month-over-month increase in the First American Loan Application Defect Index but year-over-year it was 4.8% lower. For purchase transactions it increased 2.5% compared with the previous month and fell 8.9% year-over-year. For refinance transactions there was a 1.4% rise month-over-month and a 2.9% increase compared with a year ago.

But according to the overall nationwide decline from October 2017 belies the potential for a rise in defects in areas affected by the recent wildfires.

“While the devastating impacts from the wildfires in California continue to be assessed, the risk of mortgage loan application fraud in the communities impacted is likely to increase in the coming months,” said chief economist Mark Fleming. “The Defect Index in Los Angeles has trended down in recent months, while Oxnard has experienced a relatively flat trend in fraud risk following the post-Thomas Fire surge. Given historical trends, it’s fair to expect increases in defect and fraud risk in these affected markets in the near future.”

Fleming explained that following the December 2017 Thomas Fire in Ventura and Santa Barbara counties there was a 10% spike in the index and there was a rise for five months before the index declined again.

State highlights
The five states with a year-over-year increase in defect frequency are: Alaska (+16.9%), Hawaii (+9.8%), California (+8.1%), Wyoming (+7.4%), and Maine (+6.9%).

The five states with the greatest year-over-year decrease in defect frequency are: Vermont (-22.9%), Minnesota (-19.8%), Arkansas (-15.2%), Alabama (-14.7%), and Arizona (-14.3%).