Competitive purchase market drives rise in application defects

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Loan application defects increased for the seventh consecutive month in June, due to the highly competitive purchase market, according to First American Financial Corp.

For all applications, the First American Loan Application defect index increased 1.2% month-to-month in June to 84 from 83 in May. The index is at its highest level since July 2015.

When it comes to purchase loans, the index increased to 91 from 90, while for refinance loans it increased to 70 from 68.

In June 2016, the overall index was at 72, on its way down to an all-time low of 68 for both October and November.

"The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk," said First American Chief Economist Mark Fleming in a press release.

"Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers' markets in recent memory compounds the risk of an error on a loan application."

Defects and misrepresentations are an indicator of fraud connected with the mortgage application

First American cross-referenced the cities with the highest defect index and the highest level of year-over-year change.

"Raleigh, N.C., is currently the riskiest market in the country, with a high level that is growing quickly. In fact, all of the markets in this list are in the South," said Fleming. "Combining the levels of risk and rate of change rankings of loan application defect, fraud and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk and the risk in these markets continues to grow at a strong pace."

Raleigh has a defect index value of 97, up 49.2% from last June. It is followed by New Orleans, with a defect index value of 98, up 25.6%; Tampa, Fla., 95, up 23.4%; Birmingham, Ala., 99, up 20.1%; and Charlotte, N.C., 90, up 26.8%.

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Mortgage fraud Purchase Refinance Underwriting First American Financial Corp. North Carolina Florida