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TH E M R EP O RT | 37 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 The Motivations Behind Misrepresentation First American explains how rising purchase loans and a competitive market drive up defect risk. T he frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications increased by 4.4% in February 2019 compared with the previous month, according to First American's Loan Application Defect Index. Year-over-year, the index rose 14.5%. An increase in purchase loans as refis dried up, and a competitive housing market with increasing home prices and low inventory for the most part of 2018 were responsible for this rise as buyers faced pressure to seek qualification for larger loan amounts, according to Mark Fleming, Chief Economist at First American. However, the index remained 6.8% lower than its October 2013 high. While the refinance index rose 24.6% in February compared with the same time last year, pur - chase defects rose 8.8% compared to February 2018, the report indicated. A shift towards purchase loans was another factor that led to a rise in defects, according to Fleming. "The shift in the mix of loan applications toward more purchase applications and pressure on bor - rowers likely fed the 2018 increase in income-specific defects," Fleming said. "Purchase loan applications typically are more likely to have fraud than refinance transactions. Furthermore, in the strong seller's market we experienced in 2018, borrowers had more motivation to misrepresent income on a loan ap - plication in order to qualify for the bigger mortgage necessary to win the bidding war for a home." However, as mortgage rates be - gan falling toward the end of 2018 and have remained in the low range since then, income-specific defects are also likely to plateau in 2019. "2018 ended the year with a decline in the 30-year, fixed-rate mortgage in December, a trend that has persisted through the first quarter of the year. Additionally, nominal house price appreciation in January sank to the slowest pace of growth since February 2015, according to DataTree by First American House Price Index," Fleming said. "As afford - ability improves and demand increases going into the spring home-buying season, we expect the seller's market conditions to return, potentially elevating income misrepresentation risk as well." "In the strong seller's market we experienced in 2018, borrowers had more motivation to misrepresent income on a loan application in order to qualify for the bigger mortgage necessary to win the bidding war for a home." —Mark Fleming, Chief Economist at First American.

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