October 2016 Loan Application Defect Index

A North-South Divide Emerges in Defect, Fraud and Misrepresentation Risk

"Cotton states in the South are showing the highest levels of risk, compared to the northern rust-belt, where application and defect risk is currently the lowest," says Chief Economist Mark Fleming.

The First American Loan Application Defect Index showed that in October 2016:

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, decreased 1.4 percent in October as compared with September.
  • Compared to October 2015, the Defect Index decreased by 13.9 percent.
  • The Defect Index is down 33.3 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions decreased 1.7 percent month-over-month, and is 15.9 percent lower than a year ago.
  • The Defect Index for purchase transactions is unchanged compared to last month, and is down 5.9 percent compared to a year ago.

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

  1. Maine (+30.6%)
  2. South Dakota (+19.6%)
  3. Vermont (+15.1%)
  4. North Dakota (+11.1%)
  5. Wyoming (+11.1%)

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

  1. Michigan (-21.7%)
  2. Florida (-19.8%)
  3. California (-19.5%)
  4. Oklahoma (-17.0%)
  5. Rhode Island (-16.7%)

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

  1. St. Louis (+4.2%)

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

  1. Louisville/Jefferson, KY (-28.9%)
  2. Detroit (-27.5%)
  3. Sacramento, CA (-25.3%)
  4. Orlando, FL (-24.7%)
  5. Oklahoma City (-24.5%)

"The post-election sudden increase in mortgage rates has accelerated the shift away from a refinance-driven market toward a purchase-dominated market," said Mark Fleming, chief economist at First American. "Based on analysis of loan application defect risk trends, purchase loans are riskier, so I expect that the overall decline in loan application and defect risk will slow as rates continue to rise into 2017 and the share of higher risk purchase loans increases."

A North-South Divide

"Defect, fraud and misrepresentation risk can vary substantially by location. In fact, the most recent data is showing a growing division between the North and South," said Mark Fleming, chief economist at First American. "Cotton states in the South are showing the highest levels of risk, compared to the northern rust-belt, where application and defect risk is currently the lowest."

  • Defect risk is concentrating in the South, particularly in Arkansas and Louisiana, as well as in large markets in Texas and South Carolina.
  • McAllen, Texas; Houston; Columbia, S.C.; Birmingham, Ala. and Charleston S.C. currently have the highest loan application defect and misrepresentation risk in the nation.
  • New Orleans; Baton Rouge, La. and Little Rock, Ark. are also ranked highly for defect risk among the largest 100 metropolitan areas of the country.
  • Comparatively, markets in the northeast states of New York, Pennsylvania, and Ohio have the least loan application defect 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 $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad. 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. © 2016 by First American. Information from this page may be used with proper attribution.