For the first time in eight months, the Loan Application Defect Index for purchase transactions increased compared with the month before, rising 1.3 percent in September over August. Year over year, the Defect Index for purchase transactions decreased 11.1 percent. The Defect Index for refinance transactions also increased by 1.4 percent compared with the month before, but remained the same when compared with a year ago.

“While we have not yet seen the full impact of the hurricane season on defect risk trends, we already see preliminary defect risk spikes in states impacted by Hurricane Florence.”

Hurricane Florence Prompts Rising Tide of Defect Risk in North and South Carolina

Beyond the devastating effect of hurricanes on the lives of those in their path and the damage on their homes, natural disasters also impact loan application defect risk.  Hurricanes, especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition and identity fraud in mortgage applications.

According to trend data in the Defect Index, we’re seeing this potential for mortgage fraud risk become a reality. Since the beginning of the year, the Defect Index has steadily decreased nationally, falling 8.4 percent from January through July 2018. However, the last two months have seen a reversal in this trend, with overall defect risk increasing 2.6 percent from August 1 through September 30. In fact, September is the first month this year to experience an increase in the Defect Index for purchase transactions. While we have not yet seen the full impact of the hurricane season on defect risk trends, we already see preliminary defect risk spikes in states impacted by Hurricane Florence, North and South Carolina.

Recent estimates show that Hurricane Florence’s flooding and wind destruction damaged approximately 50,000 residential units, with nearly 80 percent of these homes located in North Carolina. Worst-case projections estimate a total of $28.5 billion in flooding losses, plus 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. The rise in defect risk is more pronounced when comparing with three months ago, as North and South Carolina experienced 6.6 percent and 9.7 percent respective increases in defect risk.

Based on Hurricane Irma Trend Data, Defect Risk Likely to Rise in Florida

Unfortunately, Hurricane Florence did not mark the end of hurricane season. 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 residential real estate in the state.

Defect Index trend data from 2017 provides a glimpse at what we might expect in the months ahead. Before Hurricane Irma hit Florida in 2017, defect risk was decreasing. However, following the storm, the trend reversed course in September 2017, rising 10 percent through December. Since December 2017, defect risk has declined in Florida. Unfortunately, historical trends indicate that we should expect defect risk to increase in Florida over the next few months.

The good news is that defect risk spikes due to natural disasters tend to stabilize given time. In the case of Hurricane Irma, defect risk in Florida took approximately three months to stabilize, 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.

For Mark’s full analysis on loan defect risk, the top five states and markets with the greatest increases and decreases in defect risk, and more, please visit the Loan Application Defect Index.

The Defect Index is updated monthly with new data. Look for the next edition of the Defect Index the week of November 23.