Although mortgage lending grew less risking in September for the first time in 2017, disaster areas in Texas and Florida saw an increase in risk, according to the Loan Application Defect Index from First American Financial, a provider of title insurance, settlement services and risk solutions for real estate transactions.
The index, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, decreased 1.2% from August to September. However, it is still up a full 20.3% from September 2016.
But while this represents a significant increase from last year, it is still down 18.6% from the high point of risk in October 2013.
“In July and August, we reported that the Loan Application Defect Index didn’t rise, which was good news given that loan application defect, fraud and misrepresentation risk had risen throughout 2017,” First American Chief Economist Mark Fleming said. “In September, the overall risk of defects, fraud and misrepresentation declined for the first time this year, although there are regions with higher defect risk due to recent natural disasters.”
Before hurricanes Harvey and Irma hit, mortgage risk in Florida and Texas was decreasing, however the storms cause the trend to reverse course in September. Due to flooding in Houston, the index showed risk surged 7.2%, the largest month-over-month increase among the top 50 metropolitan markets.
“Unfortunately, historical data indicates that natural disasters and loan application defect risk go hand-in-hand,” Fleming said. “Our defect, misrepresentation and fraud risk index identified signs of this risk trend in Texas and Florida this month and particularly in Houston, where risk increased the most among all the major markets we track.”
And not only are mortgage originations growing riskier, but even mortgages that were already written have increasingly fallen into default. Almost two months after Hurricane Harvey, Black Knight’s “first look” report on the September 2017 mortgage data showed number of non-current mortgages (those at least 30 days past-due or in active foreclosure) surged by 214,000, or 9%, driven primarily by fallout from Hurricanes Harvey and Irma.
But the hurricanes aren’t just changing the numbers when it comes to mortgages. After new home sales surged to a 10-year high in September, baffling economist, one expert explained the hurricanes are to blame for the high numbers, but they could be deceiving.
“The Census Bureau warns us of this in their FAQ stating ‘information on the sales status at the end of August was collected for only about 65% of cases in the Texas and Florida counties in the FEMA Individual Assistance disaster declarations. Typically, this information is collected from respondents or by observation for nearly 95% of cases sampled for SOC,’” LendingTree Chief Economist Tendayi Kapfidze said.
“Everyone is scratching their heads about this, but the number was so high because it was more of a guess than usual,” Kapfidze said. “The hurricane effect is real and reveals itself in the difficulty compiling the data, creating the error and the 10-year high. The 10-year high may be real, and we are certainly close to such an event, but we would suggest not reading too much into this single month given the data difficulties.”