May 2017 Loan Application Defect Index

Defect, Fraud and Misrepresentation Risk Heats Up to Levels Not Seen Since 2015

"The purchase-pivot in the housing market continues add fuel to the fire of the overall level of application, defect and fraud risk," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 2.5 percent in May 2017 as compared with the previous month.
  • Compared to May 2016, the Defect Index increased by 13.7 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased 3.0 percent month-over-month, and is 9.7 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent compared to last month, and is up 11.1 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 (+56.4%)
  2. North Dakota (+50.0%)
  3. Wyoming (+40.9%)
  4. West Virginia (+35.6%)
  5. Iowa (+34.4%)

There is no state with a year-over-year decrease in defect frequency.

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

  1. Raleigh, NC (+39.4%)
  2. Tampa, FL (+21.8%)
  3. Buffalo, NY (+21.3%)
  4. New Orleans (+20.5%)
  5. Charlotte, NC (+19.2%)

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

  1. Oklahoma City (-4.7%)
  2. Milwaukee (-1.3%)

"The Loan Application Defect Index is now reaching levels of risk not seen since 2015," said Mark Fleming, chief economist at First American. "While risk is growing in both purchase and refinance transactions, it is important to recognize that loan application defect, fraud and misrepresentation risk remains below the peak reached in 2013. Purchase transaction risk is 13 percent below the peak and refinance transaction risk is 32 percent below the peak. The purchase-pivot in the housing market continues to add fuel to the fire of the overall level of application, defect and fraud risk."

Loan Application Defect Risk "Heat Wave" Fries Several Southern Markets

"Given the heat wave gripping many parts of the country, this month I am highlighting the loan application defect risk 'heat wave' that is frying several markets in the South, according to the Loan Application Defect Index," said Fleming.

Rank Market Defect Index Value Year-Over-Year Change
1 McAllen, TX 106 10.4 percent
2 Charleston, SC 100 12.4 percent
3 Birmingham, AL 98 18.1 percent
4 Knoxville, TN 98 22.5 percent
5 Augusta, GA 96 35.2 percent

"These hot spots for loan defect risk are getting hotter, as the risk in these markets is increasing significantly. The defect risk in each market has increased by a minimum of at least 10 percent in the past year. Southern markets are experiencing some of the strongest growth in housing demand, as people seek the lower cost of living compared to northeastern and western markets. Where there's smoking demand, the flames of defect risk typically follow," said Fleming.

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.