TheMReport

40 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION A Storm of Defects The impact of the recent hurricane season on mortgage loan applications. A ccording to the First American Loan Application Defect Index for September 2018, the frequency of defects, fraudulence, and misrepresentation in mortgage loan applications rose 1.3 percent compared with August 2018. The rise, said Mark Fleming, Chief Economist, First American, was prompted by Hurricane Florence. "Hurricanes, especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral conditions and identity fraud in mortgage applications," Fleming said. The index reflects this trend. While the index saw a steady decrease since the beginning of 2018, the last two months have seen a surge in defect risk that in- creased 2.6 percent from August 1 to September 30, according to First American's data, with preliminary defect spikes being seen in North Carolina and South Carolina— both states affected by Hurricane Florence. Worst-case projections on the destruction of Hurricane Florence, estimate losses from flooding at $28.5 billion and an additional $1.5 billion in wind damage. "North and South Carolina experienced nearly identical monthly increases in the Defect Index in September, 5.3 percent and 5.2 percent, respectively," Fleming said. "The rise in defect risk is more pro- nounced when comparing with three months ago, as North and South Carolina experienced 6.6 percent and 9.7 percent respective increases in defect risk." Additionally, according to Fleming, Hurricane Florence does not mark the end of the damages from the hurricane season this year. "Using data from DataTree by First American and the National Hurricane Center, we estimate that Hurricane Michael, the strongest hurricane on record to hit Florida, will impact $125 billion of residen- tial real estate in the state," he said. Using the defect data from 2017, Fleming projected what lies ahead for mortgage application defect risks. He said that looking at data after Hurricanes Irma and Maria that hit Florida in 2017 showed defects in Florida increased 10 percent through December 2017. This could repeat in 2018, too. "The good news is that defect risk spikes due to natural disasters tend to stabilize given time," Fleming said. "In the case of Hurricane Irma, defect risk in Florida took approximately three months to sta- bilize, while defect risk in the New York metropolitan area took almost a full year before defect, fraud, and misrepresentation risk returned to pre-Hurricane Sandy levels." Down Payment Hardships As home values outpace income growth, the time it takes to afford a down payment is increasing. S aving for a 20 percent down payment on a home took 5.5 years two decades ago. Since then, home values have increased at twice the pace as incomes. Today, for a person earning a median income and saving 10 percent each month, it would take a little more than seven years to save for a down payment, according to a study by Zillow. Zillow's Housing Aspirations Report showed that saving for a down payment was one of the biggest barriers to owning a home, and as home values con- tinued to outpace income, saving for a down payment has become increasingly harder. The report indicated that the length of time it took to come up with a down payment strictly from saving was probably a factor in why 43 percent of the typical down payment came from saving over time. Today's buyers rely on other sources such as the sale of a previous home or a gift from fam- ily or friends for the rest. "The simple fact that home values have far outpaced in- come growth, lengthening the time needed to save for a down payment, contributes to millen- nials' struggles to enter home- ownership," said Skylar Olsen, Director of Economic Research at Zillow. "Saving up for a down payment can be tough, especially when the cost of everyday life outpaces the money you put into the bank. It requires good budget- ing and long-term planning. It's one reason why more and more first-time homebuyers are looking to family and friends for financial help when coming up with their down payment." For homebuyers looking to buy a home sooner, Pittsburgh would be an ideal location as it took only 4.8 years to save for a 20 percent down payment, the study found. On the other hand, it would take a homebuyer 22 years of saving for a 20 percent down payment on a median home worth $1.2 million in a market like San Jose, California. Other cities where it took longer than the average seven years to save for a down pay- ment included Los Angeles (18.4 years), San Francisco (18.3 years), San Diego (15.4 years), Seattle (11.7 years), and New York (11.4 years). "The simple fact that home values have far outpaced income growth, lengthening the time needed to save for a down payment, contributes to millennials' struggles to enter homeownership." — Skylar Olsen, Director of Economic Research, Zillow

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