Mortgage risk hits 2-year high

Mortgage risk has spiked to a two-year high – with the South among the areas hardest hit, according to First American Financial Corporation.

According to First American, the frequency of fraud, misrepresentation and defects on mortgage applications is at a level not seen since 2015. First American’s most recent Loan Application Defect Index showed that the frequency of defects, fraud and misrepresentation on all loan applications rose 2.5% month over month in May and a full 13.7% year over year.

The defect index for refinance transactions was up 3% moth over month and 9.7% from May of 2016. The purchase transaction index was up 1.1% from April and 11.1% from May of last year, according to First American.

“The Loan Application Defect Index is now reaching levels of risk not seen since 2015,” said Mark Fleming, First American’s chief economist. “While risk is growing in both purchase and refinance transactions, it is important to realize that loan application defect, fraud and misrepresentation risk remains below the peak reached in 2013.”

Fleming said increased mortgage risk was especially prevalent in several Southern markets. In Knoxville, Tenn., defect risk was up 22.5% year over year. In Augusta, Ga., risk has shot up a staggering 35.2% since last year.

“These hot spots for loan defect risk are getting hotter, as the risk in these markets is increasing significantly,” he said. “…Southern markets are experiencing some of the strongest growth in housing demand, as people seek the lower cost of living compared to northeastern and western markets. Where there’s smoking demand, the flames of defect risk typically follow.”

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