April 2016 Loan Application Defect Index

Economic Turnaround in Detroit is Fast Improving its Defect Risk Profile

"The Detroit of old is fast disappearing and being replaced by a market with one of the fastest improving loan application, misrepresentation and fraud risk profiles in the country," says Chief Economist Mark Fleming.

The First American Loan Application Defect Index, which estimates the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, decreased 1.3 percent in April as compared with March and decreased by 5.1 percent as compared with April 2015. The Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type, is down 26.5 percent from the high point of risk in October 2013.

April's decline in defect risk was proof that the modest increase observed in March was not the beginning of an upward trend in defect risk. The index is again at the lowest point since its inception. Since the peak in late 2013, defect misrepresentation and fraud risk has trended significantly lower. While loan production expenses have increased during this time period, the decline in defect risk is reflective of the adoption and investment in better and more compliant loan manufacturing procedures.

The Defect Index for refinance transactions declined 3.0 percent month-over-month, and is 7.2 percent lower than a year ago. The Defect Index for purchase transactions declined 1.2 percent month-over-month, and is down 5.7 percent compared to a year ago.

It's important to note that misrepresentation and fraud risk is consistently higher on purchase transactions than refinance transactions. We expect, as mortgage rates increase, the share of refinance transactions will decline. So, it is possible that the overall Defect Index could indicate an increase in risk because of a change in the relative mix of low risk refinance transactions to higher risk purchase transactions.

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

  1. North Dakota (+27.8%)
  2. Missouri (+14.7%)
  3. Utah (+12.5%)
  4. Kentucky (+10.9%)
  5. Oklahoma (+9.6%)

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

  1. Michigan (-20.4%)
  2. West Virginia (-17.4%)
  3. New Mexico (-13.0%)
  4. Florida (-12.5%)
  5. Alabama (-11.8%)

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

  1. St. Louis (+17.6%)
  2. Louisville, KY (+15.2%)
  3. Salt Lake City (+14.5%)
  4. Houston (+11.0%)
  5. Oklahoma City (+8.6%)

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

  1. Detroit (-25.5%)
  2. Jacksonville, FL (-19.4%)
  3. Hartford, CT (-14.6%)
  4. Birmingham, AL (-13.7%)
  5. Miami (-12.5%)

"The mortgage industry continues to benefit from its adoption of technology and investments to improve the loan manufacturing process. Defect and misrepresentation risk is at historically measured lows," said Mark Fleming, chief economist at First American. "Yet, we should be wary that future increases in the overall index may not represent a true reversal of this benefit, but rather a reflection of the decline in volume of lower risk refinance transactions relative to higher risk purchase transactions."

Detroit: Economic Turnaround and Loan Application Defect Risk

Compare Detroit and San Francisco

Earlier this week, we released our inaugural Real House Price Index (RHPI), which measures the price changes of single-family properties throughout the U.S. adjusted for the impact of income and interest rate changes on consumer house-buying power over time and across national, state and metropolitan area levels.

In the RHPI, we compared two important metropolitan areas of the U.S. — San Francisco and Detroit. Many think of San Francisco as the shining example of our modern technology-driven economy and Detroit as the tarnished example of our old industrially-driven economy. In fact, economically, they are very different. But, when comparing the two markets in our RHPI, San Francisco and Detroit are actually very similar. So, if the two cities are really not so different in terms of house prices adjusted for consumer house-buying power, how do they compare in terms of loan application and fraud defect risk?

Prices may be the same, but misrepresentation and fraud risk levels are not. San Francisco is a consistently lower risk metropolitan area, while Detroit has recently had higher levels of risk. However, in the most recent year, Detroit has significantly closed that gap. While San Francisco's misrepresentation and fraud risk has declined 6.8 percent from a year ago, Detroit's risk level has fallen an impressive 25.5 percent. This is largely because Detroit is experiencing an urban renaissance, in part due to the efforts of Quicken to encourage its employees to live near where they work. As Detroit puts it's tarnished industrial past behind it and develops jobs associated with today's economy, our misrepresentation and risk index will reflect those changes positively.

"As we have discussed frequently in our analysis of this index — location matters. Local economic conditions have an important influence on misrepresentation and fraud risk," said Fleming. "Economic conditions can change, and in the case of Detroit, for the better. The Detroit of old is fast disappearing and being replaced by a market with one of the fastest improving loan application, misrepresentation and fraud risk profiles in the country. You might say that Detroit is quickly becoming San Francisco on the Lake."


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.