California wildfires raise mortgage application fraud risk

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Mortgage application fraud risk continued growing for the fifth consecutive month, and the recent California wildfires are partly to blame, according to First American Financial Corp.

The frequency of defects, fraudulence and misrepresentation of information submitted in mortgage loan applications grew 2.5% month-over-month in November, according to First American's Loan Application Defect Index.

Notably, defect and fraud risk increased in all three metropolitan areas affected by California's Woolsey and Camp wildfires, which tore through the state last month and ultimately contributed to rising national risk. Mortgage application defect risk grew 6% in Oxnard, Calif., 3.3% in Los Angeles and 2.8% in San Francisco from October to November.

"Historical data indicates that natural disasters and loan application defect risk go hand-in-hand, as they increase the potential for misrepresentation of collateral condition," First American Chief Economist Mark Fleming said in a press release. "Last month, we discussed the potential implications of the recent California wildfires on mortgage fraud risk, and after examining the first month of data, it appears historical trends are playing out."

While mortgage application defect risk is up in recent months, it's still down annually. Loan application fraud risk declined 2.4% year-over-year in November.

For purchase transactions, the defect index grew 2.4% month-over-month but is down 7.7% from a year ago. For refinance transactions, it rose 2.8% on a monthly basis and also jumped 5.8% year-over-year in November.

The Camp Fire demolished 16,735 properties in Butte County, Calif., and the Woolsey Fire destroyed over 1,600 in the counties of Los Angeles and Ventura, Calif.

"Given historical trends, the question is not if defect risk will continue to increase, but when will it stop," said Fleming.

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Mortgage fraud Natural disasters Underwriting First American Financial Corp. California