March 2017 Loan Application Defect Index

Strong Sellers' Market Sends Defect, Fraud, and Misrepresentation Risk Higher for Fourth Straight Month

"Loan defect risk is concentrating in attractive local markets where housing demand is the strongest, primarily in the South," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 3.9 percent in March 2017 as compared with the previous month.
  • Compared to March 2016, the Defect Index increased by 3.9 percent.
  • The Defect Index is down 22.5 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased 3.3 percent month-over-month, and is 4.5 percent lower than a year ago.
  • The Defect Index for purchase transactions increased 2.4 percent compared to last month, and is up 3.6 percent compared to a year ago.

Mark Explains the Loan Application Defect Index

0:58

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

  1. Wyoming (+42.4%)
  2. South Dakota (+37.5%)
  3. North Dakota (+35.8%)
  4. Mississippi (+28.6%)
  5. West Virginia (+26.8%)

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

  1. Connecticut (-8.9%)
  2. Michigan (-6.1%)
  3. Oklahoma (-3.3%)
  4. Delaware (-3.0%)
  5. Washington (-2.5%)

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

  1. Raleigh, NC (+28.8%)
  2. New Orleans (+12.7%)
  3. Tampa, FL (+11.8%)
  4. Jacksonville, FL (+10.8%)
  5. Minneapolis (+10.7%)

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

  1. Milwaukee (-12.7%)
  2. Detroit (-12.6%)
  3. Oklahoma City (-9.2%)
  4. Louisville/Jefferson, KY (-8.8%)
  5. Hartford, CT (-8.2%)

"This month, the Loan Application Defect Index continued to trend upward as the risk on refinance and purchase transactions both increased compared to a month ago," said Mark Fleming, chief economist at First American. "After four consecutive months of increased defect risk, it's fair to call this a trend. We are experiencing one of the strongest sellers' markets in recent memory and the "speed-buying" that is required for home buyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation and fraud risk that we are observing."

Defect Risk Shifts South for Spring

  • The riskiest markets are increasingly in the South, with elevated risk stretching from Texas to Florida and up to West Virginia.
  • The five markets with the highest defect risk in the country are all based in the South: McAllen, Texas; Charleston, S.C.; Tampa, Fla.; Knoxville, Tenn.; and Baton Rouge, La.
  • The South is also one of the strongest regions of the country for housing demand. According to the most recent National Association of Realtors (NAR) existing-home sales release, the rate of existing-home sales increased 8.5 percent in March compared to a year ago. Additionally, the median price in the South was up 8.6 percent compared to a year ago.
  • Conversely, the Northeast has remained consistently low risk. The markets with the lowest level of defect, fraud and misrepresentation risk in the country are Scranton, Pa.; Toledo, Ohio; Rochester, N.Y.; Albany, N.Y.; and Harrisburg, Pa.

"Defect, fraud and misrepresentation risk is increasingly becoming a regional phenomenon. The risk is concentrating in attractive local markets where housing demand is the strongest, primarily in the South," said Fleming. "The South may not be so charming anymore if you manage loan fraud and misrepresentation risk."

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.