Why Fraud Risk is Higher in Southern States

Fleming: “These markets are beginning to feel that distress, not just because of the depressed energy-commodity prices, but also because of depressed agricultural-commodity prices.”

IRVINE, CA—Some Southern states are seeing increased home-loan application fraud risks and defects, and higher education is linked to greater likelihood to own a home, First American Financial Corp. ‘s chief economist Mark Fleming tells GlobeSt.com. The firm recently released its loan-application defect index for March, which increased 1.3% from February, although it decreased 2.6% as compared to March 2015. Some of this increase can be attributed to the Southern states, in particular Florida, Texas, Oklahoma and South Carolina. In addition, the firm recently released its homeownership progress index, which revealed that those with a higher level of education and those with children are more likely to own a home. We spoke exclusively with Fleming about both reports’ findings and what they mean for the residential sector. GlobeSt.com: Are there any commonalities among the Southern states that are experiencing increased fraud risk and defects in loan applications? Fleming: Yes. We have been tracking the Texas and Florida markets in particular recently for defect and fraud risk. Florida has perennially been a high-risk fraud market, and Miami is the highest-risk market in the country. Texas has come to the fore more recently, largely due to the economic effects of falling oil prices impacting that market. Last month, we wrote up both Texas and Florida profiles; this month, two new emerging markets for defect and fraud risk are Oklahoma and South Carolina. Looking through the data, it’s interesting—Oklahoma is similar to Houston with its energy dependency, but is that really sufficient to account for this increase? It’s not the same for South Carolina, so what’s going on there? The economic headwinds being felt in the US today are actually creating regional distress—not necessarily global nationwide distress. The financial crisis impacts everybody equally via interest rates and other factors, and it has different impacts on the housing markets, but the reason for the global recession was financial liquidity distress that caused a nationwide recession. We are now seeing that recessionary stresses are regional, and they are having a lot to do with the pricing of some commodities that are priced globally, like oil and the energy sector. Additionally, most commodities—particularly agricultural ones—have had declines in prices. For growers of cotton and corn, it’s harder today because the pricing gets set on the international market like oil. So, these markets are beginning to feel that distress , not just because of the depressed energy-commodity prices, but also because of depressed agricultural-commodity prices. The underpinning of economic stress increases defects and fraud. The loss of jobs in between applying for a loan and processing it presents external factors that create misrepresentation, and outright fraud is more likely to be present. GlobeSt.com: How does the high level of condominiums in Florida account for increased risk there? Fleming: When you buy a condo, you get a loan, and if the loan is GSE approved, then it has to be on the approved list of condo projects. We know that there are challenges with information about the properties and the addresses of condos; the information about them is more fraught with defect. An address could have the wrong unit number and come back as not found, so we need to know which property we’re talking about before we lend for you. There are a lot of condos being bought in Florida with all cash—these are investors with a mortgage—so how do you underwrite the debt-to-income ratio? Is it owner-occupied if it’s rented once in a while? Truly classifying occupancy patterns properly is difficult. How do you measure the amount of income and the vacancy rate of a condo? It’s a more complex transaction to underwrite, so historically condos are more likely to have fraud due to the misrepresentation aspect. Miami has a high concentration of condos relative to other markets, as well as a higher foreign-buyer and -investor share and a higher all-cash share, which are known elements on increased risk. GlobeSt.com: How does the energy-sector trouble translate to risk problems in Texas? Fleming: That stress might be mitigating since oil prices have rebounded from their historical lows of a few months ago, but we’re seeing other marketplaces such as Houston where the housing market is slowing down. Homes are on the market for longer, and there’s an increase of supply relative to demand. The feedthrough of economic distress in the local regional economy is playing into less-robust housing. GlobeSt.com: Your homeownership progress index just came out with some findings about the relationship between the level of education and homeownership, as well as the percentage of homeowners with children. Can you elaborate on that a bit? Fleming: It’s my favorite part of the report, and it’s actually in the long run good news. The older you are, the more likely you are to be a homeowner—not simply because you’re older; age is a proxy for the lifestyle decisions you put off until later in your career including marriage and children. When you’re 22, you’re not likely to have gotten that masters vs. if you’re 30. So, the relationship between educational attainment and income is clear: if you finish college, even if you have a loan debt higher than your income capacity is, you’re more likely to buy a home. Since 1991, the share of households at the highest level of educational attainment—and that is measured by the highest level of anyone in the household—has increased 24%. We’re becoming a more-educated society; the Millennials as a cohort are going to be the most-educated demographic cohort in the country. But here’s the issue. The difference in homeownership rates among those without a high-school degree vs. those with a bachelors was 15% in 1999. Households that didn’t even have a high-school degree—plenty of them were able to become homeowners then. Today, that difference has almost doubled. This shows the need to have higher education; it’s much more important to be educated in order to be a homeowner today. Future homebuyers are busy getting educated—that’s why they’re not getting married and having kids and buying homes. That’s what drives that homeownership decisions, so the foundation is getting stronger. GlobeSt.com: But what about student loans—aren’t they preventing the college educated from buying homes? Fleming: There was an article recently in Brookings called the “Dividing Line Between the Haves and Have Nots in Homeownership.” It emphasizes how educational attainment—not student debt—is the important factor in homeownership. The debt burden isn’t about how much student-loan debt you have; it’s how much does it cost you every month. This is the deciding factor when underwriting a mortgage payment. The length of time allowed to pay back student-loan debt has gone up. Even though graduates might have much more debt than their parents and grandparents had, it costs less to pay for the privilege of going to college because terms are extended the rates of the cost to go are reduced. The payment-to-income ratio of those who graduate is 4%, and this has been consistent for the last 20 years. Even though there’s a psychological factor (“I have $200,000 in student-loan debt, so how can I afford a mortgage?”), it’s really all about the servicing.