Mortgage

First American: The nation’s mortgage defect risk fell 7% in June

Four cities in Florida rank as top markets to experience decline in defect risk

In June, the nation’s mortgage defect risk fell for the third consecutive month, 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 applications decreased by 7% from the previous month.

That being said, America’s defect risk was still 3.9% higher than the same time period in 2018.

“This month, the Loan Application Defect Index for purchase transactions continued its downward trend, declining 7.8% in June compared with the month before, the third consecutive month defect risk in purchase transactions has fallen,” First American Chief Economist Mark Fleming said. “The Defect Index for refinance transactions also fell 6.5% compared with the previous month.”

As the defect risk continues to fall month over month, First American’s data indicates that no other state is experiencing as tremendous declines as the Sunshine State.  

According to Fleming, four cities in Florida, including Jacksonville, Tampa, Orlando and Miami were ranked among the top six cities where fraud risk declined the most on an annual basis. This positioned Florida as the second top state to experience the most declines in defect growth.

Fleming said this is a deviation from the norm, as Florida has historically exhibited a relatively greater concentration of fraud risk.

“Florida tends to have a higher percentage of investor-owned properties, which have a higher propensity for fraud risk,” Fleming said. “Indeed, according to the Defect Index in June 2019, applications for investment properties were 24% riskier than for owner-occupied properties, and applications for multi-unit properties, a popular purchase for investors, were 11% more likely to contain defects than applications for single-family homes.”

Fleming notes that fewer condo and multi-family transactions in Florida could be responsible for June’s decline, as its number of condo existing-home sales fell nearly 14% year over year.

“While there are several possible explanations for the decline in fraud in Florida markets, there is one phenomenon that is working to reduce fraud in every market – the decline of the sellers’ market,” Fleming said. “As mortgage rates fall and the strong labor markets persists, potential home buyers feel less pressure to misrepresent information on a loan application. As the saying goes, 'a rising tide lifts all boats,' and Florida is getting a bit of an extra lift this month.”

NOTE: First American’s 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.

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