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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 Analysis: Section 502 Boosted Recession Relief The NAHB found that 502 and Guaranteed loans peaked as the housing crisis worsened. U SDA single-family loan programs provided much-needed lending options when Ameri - cans had few, according to an analysis by the National Associa- tion of Home Builders released in April. The analysis found that us- age of the USDA's 502 Direct and Guaranteed loans peaked in 2013. Targeted at low-income rural buyers, Section 502 loans rose as the housing crisis worsened, increas- ing exponentially between 2006 and 2010. In 2006, Section 502 loans accounted for $1 billion in new con- struction purchases. By 2010, they accounted for $3.9 billion. Guaranteed loans grew more than Direct loans, which jumped 483 percent and 88 percent, respectively. The former didn't see a drop-off in purchases until 2014, while Direct loans began declining in 2011, just after the housing crisis. The Guaranteed program also performed better in terms of loan amount and appraised home values. "The appraised value of newly built homes under both programs generally rose between 2006 and 2009," the NAHB report stated. "However, the trend diverged over the 2009 to 2012 period. The ap - praised value of homes under the Direct program fell while the me- dian appraised value of newly built homes under the Guaranteed loan program remained about constant." The appraised values of homes purchased with both Direct and Guaranteed loans have risen since 2012. Guaranteed homes reached a peak median value of $180,000, while Direct homes reached $160,000. Direct loans started out 2006 with a large gap between loan amount and appraised value, but the gap closed over time. "In 2006, the median infla - tion-adjusted loan amount of newly built homes under the Direct program was approxi- mately $120,000, 80 percent of the inflation-adjusted appraised value," the report stated. "Over time, the gap between the two began to close, but the loan amount never exceeded the appraised value. By 2016, the median loan amount of $160,000 was 97 percent of the appraised value." On Guaranteed loans, the loan amount actually exceeded the ap - praised amount by 2011. "Under the Guaranteed program," the report stated, "the change in the gap between the median loan amount and median appraised value did not close as dramatically, but the relative levels flipped. In 2006, the median inflation-adjusted loan amount on newly built homes under the Guaranteed program was less than the median inflation- adjusted appraisal value." Loan-to-value ratio on homes purchased with 502 loans also rose over time. On Direct loans, LTV ratio reached 97 percent at one point, while Guaranteed loans reached 102 percent by 2011. According to the report: "Both 502 programs tend to have higher LTVs than conforming loans purchased by Freddie Mac." Application Defect Rate Up Amidst Seller's Market Defects, misrepresentation, and fraudulence in applications are up over the year quarter and the year. T he defect Index, which estimates the frequency of defects in information submitted in mortgage applications, shows that defects, mis - representation, and fraudulence rose 3.9 percent from February to March, as well as over the year. This was the fourth consecutive month the Defect Index has increased. According to Mark Fleming, Chief Economist at First American, the inventory-strapped seller's market is likely to blame for rising defects. "We are experiencing one of the strongest sellers' markets in recent memory," Fleming said, "and the 'speed-buying' that is required for homebuyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation, and fraud risk that we are observing." The Defect Index was up for the month on both refinance and pur - chase loans, rising 3.3 percent and 2.4 percent, respectively. Over the year, defects were down 4.5 percent on refinance transactions and up 3.6 percent on purchase ones. Defects varied greatly at the local level. According to the report, the markets with the highest risk of defects were in the southern part of the U.S., with the top five including McAllen, Texas; Charleston, South Carolina; Tampa, Florida; Knoxville, Tennessee; and Baton Rouge, Louisiana. "Defect, fraud, and misrepresenta - tion risk is increasingly becoming a regional phenomenon," Fleming said. "The risk is concentrating in attractive local markets where hous- ing demand is the strongest, primar- ily in the South," Fleming said. "The South may not be so charming anymore if you manage loan fraud and misrepresentation risk." According to Fleming, this falls in line with the "seller's market" causation theory. "The South is also one of the strongest regions of the country for housing demand," Fleming said. "According to the most recent National Association of Realtors' ex- isting-home sales release, the rate of existing-home sales increased 8.5 percent in March compared to a year ago. Additionally, the median price in the South was up 8.6 per- cent compared to a year ago." Markets in the northeastern part of the country have a much lower rate of defect. Scranton, Pennsylvania; Toledo, Ohio; Rochester, New York; Albany, New York; and Harrisburg, Pennsylvania, had the lowest levels of defect and fraud in the nation.