April 2017 Loan Application Defect Index

Fifth Consecutive Month of Increased Defect, Fraud and Misrepresentation Risk Signals Need for Vigilance

"Part of the rise in overall risk is due to the market's shift toward riskier purchase transactions, but the fact that risk in refinance transactions is also on the rise underscores the need for caution," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 2.5 percent in April 2017 as compared with the previous month.
  • Compared to April 2016, the Defect Index increased by 8.0 percent.
  • The Defect Index is down 20.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased 4.8 percent month-over-month, and is 3.1 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 2.3 percent compared to last month, and is up 7.2 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 (+49.1%)
  2. Wyoming (+43.5%)
  3. North Dakota (+39.1%)
  4. West Virginia (+35.1%)
  5. Iowa (+29.5%)

Only states with a year-over-year decrease in defect frequency:

  1. Connecticut (-2.6%)
  2. Oklahoma (-2.2%)

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

  1. Raleigh, NC (+32.8%)
  2. New Orleans (+18.2%)
  3. Tampa, FL (+17.3%)
  4. Jacksonville, FL (+16.5%)
  5. Birmingham, AL (+14.6%)

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

  1. Milwaukee (-10.1%)
  2. Oklahoma City (-9.1%)
  3. Detroit (-4.9%)
  4. Austin, TX (-4.4%)
  5. Louisville/Jefferson, KY (-2.6%)

"The Loan Application Defect Index continued its strong upward increase for the fifth consecutive month," said Mark Fleming, chief economist at First American. "The pace of defect risk growth is as strong as we have seen since the index began in 2011, adding to the concern over the five-month trend. While we have recently noted that part of the rise in overall risk is due to the market's shift toward riskier purchase transactions, the fact that risk in refinance transactions is also on the rise underscores the need for caution."

The Five "Coolest" Loan Application and Defect Risk Markets

"Usually, I emphasize defect risk hot spots in the analysis of our monthly Loan Application Defect Index, focusing on hot spots for rising defect risk. Instead, this month I am highlighting the defect risk "cool" spots, the five markets with the lowest defect risk among the 100 markets we follow," said Fleming.

Rank Market Defect Index Value Year-Over-Year Change
1 Scranton, PA 55 12.2 percent
2 Toledo, OH 63 14.5 percent
3 Omaha, NE 65 1.6 percent
4 Philadelphia 65 3.2 percent
5 Richmond, VA 66 1.5 percent

"Scranton, Pennsylvania takes the prize as the 'coolest' spot, or the market with the lowest loan application and defect risk in the country," said Fleming. "But, lenders beware, with a defect risk growth rate of 12.2 percent year-over-year, Scranton may not be cool to defect risk for long. So, what matters more? The risk today or, proverbially, tomorrow?"

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.