Mortgage industry continues to count the cost of hurricanes

The potential for increased mortgage fraud risk to become a reality is highlighted in data from First American Financial Corp.

Its Mortgage Defect Index for September 2018 shows a 1.3% rise in the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, while the index has declined 6% year-over-year.

The Defect Index for purchase transactions increased by 1.3% compared with the previous month and is down 11.1% compared with a year ago.

Nationally, the index has decreased steadily since the beginning of 2018 – 8.4% in the first 6 months – but the trend has been reversed from August 1 to September 30 with a 2.6% rise.

“While we have not yet seen the full impact of the hurricane season on defect risk trends, we already see preliminary defect risk spikes in states impacted by Hurricane Florence, North and South Carolina,” said First American’s chief economist Mark Fleming.

Hurricane Michael spike expected
Along with the increase in mortgage defects from Hurricane Florence, there is also the impact of Hurricane Michael ahead.

Using data from DataTree by First American and the National Hurricane Center, we estimate that Hurricane Michael, the strongest hurricane on record to hit Florida, will impact $125 billion of residential real estate in the state.

“Defect Index trend data from 2017 provides a glimpse at what we might expect in the months ahead. Before Hurricane Irma hit Florida in 2017, defect risk was decreasing,” added Fleming. “However, following the storm, the trend reversed course in September 2017, rising 10% through December. Since December 2017, defect risk has declined in Florida. Unfortunately, historical trends indicate that we should expect defect risk to increase in Florida over the next few months.”

Defect risk spikes due to natural disasters tend to stabilize given time. In the case of Hurricane Irma, defect risk in Florida took approximately three months to stabilize, while defect risk in the New York metropolitan area took almost a full year before defect, fraud and misrepresentation risk returned to pre-Hurricane Sandy levels.