The risk of homebuyers, sellers or lenders falling prey to a defective or fraudulent mortgage fell precipitously across the state of Florida in June, particularly in major markets like Miami. According to a standard measure of mortgage fraud and defect rates created and maintained by First American Financial Corporation, Miami’s mortgage risk score declined 7.3 percent in June compared to the prior year. Three of the state’s other major markets also saw their fraud risk levels drop the most of any other U.S. city, with Jacksonville leading the nation and registering a 15.1 percent decrease.
According to First American Chief Economist Mark Fleming, it’s actually unusual for Florida to see such low rates of mortgage defects and possible instances of fraud. In fact, the Miami metro recorded the highest rate in the nation less than four years ago. First American’s Loan Application Defect Index score for Miami currently stands at 89, compared to a national average score of 80.
It’s important to note that outright fraud is likely not happening in all cases. First American’s index tracks “loan application misrepresentation, defect and fraud risk over time.” Loan defects can include simple mistakes like miscalculating income or total assets on a mortgage application, but in any case, they can delay or prevent closings, not to mention a number of other problems.
But, despite significant progress in recent years, why is South Florida apparently a hot zone for mortgage fraud? Fleming noted that Florida and Miami’s propensity for mortgage issues could come down to a couple of unique characteristics.
“Florida tends to have a higher percentage of investor-owned properties, which have a higher propensity for fraud risk,” Fleming said in a press release on the June data. Loans for an investment home purchase are often flagged because “investors can claim they are purchasing a property as a second home (to capitalize on lower rates), when they actually plan to rent it out as an investment property,” he added. Defects and fraud can also result from misrepresented income or undisclosed mortgage debt that’s found in the underwriting process.
Fortunately, mortgage fraud risks are declining nationwide. Here again, it’s anyone’s guess as to why exactly this is the case.
“While there are several possible explanations for the decline in fraud in Florida markets, there is one phenomenon that is working to reduce fraud in every market – the decline of the sellers’ market,” Fleming said. “As mortgage rates fall and the strong labor market persists, potential home buyers feel less pressure to misrepresent information on a loan application. As the saying goes – a rising tide lifts all boats – and Florida is getting a bit of an extra lift this month.”