June 2017 Loan Application Defect Index

Seventh Consecutive Month of Increased Defect, Fraud and Misrepresentation Risk Driven by Shortage of Homes for Sale

"The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 1.2 percent in Jun 2017 as compared with the previous month.
  • Compared to June 2016, the Defect Index increased by 16.7 percent.
  • The Defect Index is down 17.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased 2.9 percent month-over-month, and is 16.7 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent compared to last month, and is up 13.8 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 (+66.7%)
  2. North Dakota (+52.2%)
  3. Wyoming (+46.3%)
  4. West Virginia (+37.9%)
  5. North Carolina (+35.3%)

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 (+49.2%)
  2. Charlotte, NC (+26.8%)
  3. New Orleans (+25.6%)
  4. Tampa, FL (+23.4%)
  5. San Jose, CA (+23.3%)

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

"Following seven straight months of increases, the Loan Application Defect Index is now at the same level as almost two years ago in July 2015," said Mark Fleming, chief economist at First American. "The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk. Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers' markets in recent memory compounds the risk of an error on a loan application."

Rising Risk in Already Risky Markets

  • We often look at the level of risk or the magnitude of change in risk over a particular time, but less often the combination of the two.
  • For example, the five markets with the greatest increase in defect frequency are Raleigh, N.C.; Charlotte, N.C.; New Orleans; Tampa, Fla.; and San Jose, Calif.
  • According to Defect Index data, the markets with the highest levels of risk are currently Birmingham, Ala.; New Orleans; Raleigh, N.C.; Miami; and Tampa, Fla.
  • By cross-referencing these two lists, high risk levels and fastest rising risk, we can identify the five riskiest markets with the fastest increasing risk.
Rank Market Defect Index Value Year-Over-Year Change
1 Raleigh, NC 97 49.2 percent
2 New Orleans 98 25.6 percent
3 Tampa, FL 95 23.4 percent
4 Birmingham, AL 99 20.1 percent
5 Charlotte, NC 90 26.8 percent

"Raleigh, N.C. is currently the riskiest market in the country, with a high level that is growing quickly. In fact, all of the markets in this list are in the South," said Fleming. "Combining the levels of risk and rate of change rankings of loan application defect, fraud, and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk and the risk in these markets continues to grow at a strong pace."

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.