In January, declining mortgage rates mixed with higher loan applications led to more risk of fraud and other errors in the home loan applications, according to the latest First American Loan Application Defect Index.

According to the report, the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications rose 4.6% from the previous month, increasing 9.6% from January 2018.

Nationally, the Defect Index for refinance transactions moved forward 5.1% from December and is up a whopping 20.3% from the same time a year ago. Notably, the Defect Index for purchase transactions climbed 5.6% from December and is up 3.3% from 2018.

First American Chief Economist Mark Fleming said: “Overall, the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 4.6% compared with the previous month. While overall fraud risk has been on the rise since July 2018 due partially to the impact of natural disasters, the last two months have experienced an acceleration in fraud risk – what could be driving this change?”

According to Fleming, the rise is attributed to a plunge in rates and spike in mortgage applications.

“Surprisingly, mortgage rates declined in December and continued falling into January, reaching their lowest levels since April 2018," Fleming continued. "Prospective home buyers and existing homeowners reacted to the lower rates, resulting in a mini-boom in mortgage applications, both purchase and refinance."

Overall, Fleming said a rise in purchase and refinance applications, coupled with strong first-time home buyer demand and tight inventory, bodes well for an early spring home-buying season.

However, Fleming notes that this could contribute to further increases in defect risk.

“Historically, purchase transactions tend to be more at risk of defects, fraud and misrepresentation, and the pressures resulting from rising demand and a strong sellers’ market compounds that risk,” Fleming continued. “When home values are rising, and the housing market is competitive, more buyers want to enter in the market. As a result, misrepresentation and fraud are more likely on a loan application.”

Defect Index measures the frequency of which defect indicators are identified. The index is benchmarked to a value of 100 in January 2011, meaning all index values are interpreted as the percentage change in defect frequency relative to that time, according to the company.