September 2017 Loan Application Defect Index

Florida and Texas Buck National Defect Risk Trend

"Unfortunately, historical data indicates that natural disasters and defect risk go hand-in-hand and that trend seems to be playing out in Florida and Texas," says Chief Economist Mark Fleming.

The First American Loan Application Defect Index showed that in September 2017:

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications is down 1.2 percent month-over-month.
  • Compared to September 2016, the Defect Index increased by 20.3 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions remained the same compared to the previous month, and is 18.6 percent higher than a year ago.
  • The Defect Index for purchase transactions decreased 1.1 percent month-over-month, and is up 12.5 percent compared to a year ago.

Mark Explains the Loan Application Defect Index

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States with the highest year-over-year increase in defect frequency:

  1. South Dakota (+54.2%)
  2. North Dakota (+45.7%)
  3. Wyoming (+40.3%)
  4. New Mexico (+40.0%)
  5. Iowa (+39.3%)

There is one state with a year-over-year decrease in defect frequency.

  1. Connecticut (-2.8%)

Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with a year-over-year increase in defect frequency:

  1. Raleigh, NC (+52.4%)
  2. Virginia Beach, VA (+29.7%)
  3. Tampa, FL (+27.4%)
  4. Jacksonville, FL (+24.7%)
  5. San Antonio (+24.6%)

Among the largest 50 Core Based Statistical Areas (CBSAs), no market had a year-over-year decrease in defect frequency.

"In July and August, we reported that the Loan Application Defect Index didn't rise, which was good news given that loan application defect, fraud and misrepresentation risk had risen throughout 2017," said Mark Fleming, chief economist at First American. "In September, the overall risk of defects, fraud and misrepresentation declined for the first time this year, although there are regions with higher defect risk due to recent natural disasters."

Post-Natural Disaster Defect Risk Trends Appear to be Playing Out in Florida and Texas

"Unfortunately, historical data indicates that natural disasters and loan application defect risk go hand-in-hand," said Fleming. "Our defect, misrepresentation and fraud risk index identified signs of this risk trend in Texas and Florida this month and particularly in Houston, where risk increased the most among all the major markets we track."

  • Last month, based on data from previous natural disasters, we highlighted the potential for increased mortgage loan application fraud risk due to the hurricanes in Florida and Texas, particularly fraudulent or unintentional misrepresentation of collateral condition.
  • In September, we see signs that this trend is bearing out in hurricane-impacted states. While nationally defect risk declined in September, the level of defect, fraud and misrepresentation risk has increased in Florida and Texas by 2.2 percent and 1.2 percent, respectively, compared to August.
  • Prior to the hurricanes, defect risk in Florida and Texas was declining, but that trend has reversed in September.
  • In Houston, which was severely impacted by flooding, defect, fraud and misrepresentation risk surged 7.2 percent, the largest month-over-month increase among the top 50 metropolitan markets. Flooding is associated with elevated risk for misrepresentation of collateral risk condition.
Chart: Comparison of Florida and Texas Defect Index Values

Methodology

The First American Loan Application Defect Index estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard® system. The index is based on the frequency with which defect indicators are identified. The Defect Index moves higher as greater numbers of defect indicators are identified. An increase in the index indicates a rising level of loan application defects. The index, nationally and in all markets, is benchmarked to a value of 100 in January 2011. Therefore, all index values can be interpreted as the percentage change in defect frequency relative to the defect frequency identified nationally in January 2011.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk solutions for real estate transactions that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With revenues of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.

Opinions, estimates, forecasts and other views contained in this page are those of First American's Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American's business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2017 by First American. Information from this page may be used with proper attribution.