Misrepresentations on mortgage applications have inched up nationwide for the first time since July, thanks in part to trends in the energy and agricultural sectors which are creating pressure in the South, according to First American Financial Corp.
The Santa Ana, Calif.-based title insurer's Loan Application Defect Index increased 1.3% from the previous month in March to 76, the first monthly increase since July. The figure nonetheless remained 2.6% down from a year ago.
"While February 2016 is now the new low point for the index, it's too early to know if the increase in misrepresentation and fraud risk in March is the beginning of a long-term upward trend or a short-term adjustment," First American chief economist Mark Fleming said in a news release Thursday. Fleming cited increases in risk among Federal Housing Administration, Veterans Administration and United States Department of Agriculture loans as contributing factors, since conventional loans had no month-over-month change.
The defect index for refinance transactions was up 1.5% from February, and the defect index for purchase transactions was 1.2% higher month-over-month. Compared to last year though, the indexes were down 5.7% and 3.4%, respectively.
On a state level, North Dakota had the highest year-over-year increase in defect frequency at 19.6%, followed by Kentucky, Utah, Missouri and the District of Columbia. The metropolitan area with the highest year-over-year jump was Louisville, Ky.
Conversely, Michigan was the state with the biggest year-over-year drop in defect frequency with a 15.5% decline, followed by West Virginia, Alabama, New Mexico, Oregon and Mississippi. Similarly, Detroit had the biggest decrease of any metropolitan area at negative 19.4%.
First American's report continued to look at emerging issues across the South that are contributing to higher levels of misrepresentation and fraud risk, after focusing on the impacts of the downturn in energy prices in Texas and the high concentration of condominiums in Florida. In particular, the report noted that Oklahoma and South Carolina are emerging as riskier markets.
Misrepresentation and fraud risk is up in Oklahoma by 8.4% year-over-year and in South Carolina by 7.4%. Similarly, the major metro areas of Tulsa, Okla., and Charleston, S.C., have seen their risk increase by more than 10% from 2015. While Oklahoma can attribute its higher risk in part to the weakness in the energy sector, the two states have a factor in common: agriculture.
"Agricultural commodities, such as corn, rice, cotton and wheat, have all suffered significant price declines in the last few years," said Fleming. "As in the energy sector, slowing global economic growth has triggered a decline in demand for agricultural commodities relative to supply. In addition, strong demand for U.S. bonds has increased the strength of the U.S. dollar and made agricultural exports more expensive abroad."
Falling prices for agricultural goods is likely to create economic distress, which in turn could increase the incentive for loan application misrepresentation or fraud, Fleming added.
