The frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications jumped 4 percent in February. That’s according to First American Financial Corporation, which its latest Loan Application Defect Index Friday. Compared to a year ago, the index increased by 1.3 percent.
Compared to January, those overall numbers are reflected in the separate parts of loan apps the index charts. Incidents in refinance transactions increased 3.4 percent, while purchase transactions jumped 2.4 percent. The latter is the same increase seen compared to last year; for refis, incidents are up more than 6 percent from a year ago.
Mark Fleming, Chief Economist at First American, cited rising mortgage rates as the reason for the February spike. He said rising rates “continue to put downward pressure on lower risk mortgage refinance activity” and are driving more borrowers to apply for ARMs.
“The savings for the consumer can be significant,” Fleming said, “but ARM loan applications have historically had higher defect, misrepresentation, and fraud risk.”
The average rate for a 30-year, fixed-rate mortgage was 4.15 percent in February. With the spring buying season ahead, Fleming said the volume of higher-risk applications will grow, and with it will come the increased risk of defects and fraud.
Over the last three months, loan application, defect and fraud risk has increased by 5.6 percent on ARM loan applications, according to First American.
Wyoming led states with the greatest annual increase in defects on First American’s report. Incidents in Wyoming were up 43 percent from last year. North Dakota saw a 38 percent spike, Mississippi a 32 percent rise, and South Dakota a 31.5 percent rise in incidents. Montana, with a a 26.5 percent hike in incidents, rounded out the five states with the largest year-to-year bump in defects.
In individual markets, Raleigh’s 28 percent spike in incidents since last February led the way. No other metros saw near that kind of increase in defects. Birmingham, St. Louis, and Minneapolis all broke 11 percent; and Jacksonville jumped nearly 10 percent.
On the other end of the dial, Michigan and Connecticut both reported more than 9 percent decreases in defects compared to last year. New York saw a 7.4 percent drop, while Maryland and California each saw drops of 5.4 percent. Detroit’s 17 percent dip in defect frequency led metros over last year. Louisville and Milwaukee both saw decreases of more than 14 percent, while Austin and Oklahoma City both saw drop-offs of 12 percent compared to last year.