Loan Application Defect Index Falls 1.2 Percent In September

- A gap is growing between the low defect risk "cool spots" and the high defect risk "hot spots," says Chief Economist Mark Fleming -


October 28, 2015, Santa Ana, Calif.,

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today released the First American Loan Application Defect Index for September 2015, which estimates the frequency of defects in the information submitted in mortgage loan applications. The Defect Index reflects estimated mortgage loan defect rates over time, by geography and by loan type. It’s available as an interactive tool that can be tailored to showcase trends by category, including amortization type, lien position, loan purpose, property and transaction types, as well as state and market comparisons of mortgage loan defect levels. 

September 2015 Loan Application Defect Index

The First American Loan Application Defect Index fell 1.2 percent in September as compared with August and decreased by 9 percent as compared with September 2014. The Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type, is down 20.6 percent from the high point of risk in October 2013.

This is the third month in a row that defect and misrepresentation risk has declined, returning the Defect Index to the level reported in May 2015 and reversing the upward trend in the first half of the year. The Defect Index has fallen more than three percent over the last three months. The index is up 3.8 percent from the low point for defect risk set in March 2015, yet remains well below the level of defect risk observed throughout most of the historical series.

The Defect Index for refinance transactions declined 1.4 percent month-over-month, and is now 10 percent lower than a year ago. The Defect Index for purchase transactions improved 1.1 percent month-over-month, and is down 8.4 percent compared to a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions has declined much more than defect risk for purchase transactions, declining 29 percent as compared to 16.3 percent for purchase transactions.

"A trend is beginning to emerge nationally as defect risk has now declined for three months in a row, mitigating some of the increased risk that was observed in the early part of the year. The defect risk gap remains pronounced by loan purpose. Since late 2013, defect risk has declined more rapidly in refinance transactions than in purchase transactions," said Mark Fleming, chief economist at First American. "As rates increase and a more purchase-based mortgage market emerges next year, defect risk will rise overall, as it is more common on purchase transactions."

September 2015 State Highlights

  • The five states with the highest month-over-month increase in defect frequency are: North Dakota (+3.4 percent), Oklahoma (+2.1 percent), Wyoming (+1.6 percent), Montana (+1.3 percent) and Maryland (+1.3 percent).
  • The five states with the highest month-over-month decrease in defect frequency are: West Virginia (-6.6 percent), Washington D.C. (-4.9 percent), New Hampshire (-4.6 percent), Iowa (-4.6 percent) and Connecticut (-4.6 percent).

September 2015 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest month-over-month increase in defect frequency are: Raleigh, N.C. (+1.4 percent); Las Vegas (+1.4 percent); Cleveland (+1.3 percent); Baltimore (+1.3 percent); and Cincinnati (+0.0 percent).
  • Among the largest 50 CBSAs, the five markets with the highest month-over-month decrease in defect frequency are: Columbus, Ohio (-5.3 percent); Hartford, Conn. (-4.8 percent); Detroit (-4.3 percent); Boston (-4.3 percent); and Providence, R.I. (-4.2 percent). 

Market Close Up: Market Risk Dispersion

This month, First American added a market risk dispersion index that measures the amount of variation in defect risk among the top 100 CBSAs. A rising dispersion index indicates that variation in defect risk across markets is increasing and a declining index indicates the variation among markets is decreasing. While the overall trend in defect risk has been declining in recent months, looking below the national surface, dispersion has been increasing. The difference in defect risk across markets is becoming larger. In fact, since November 2014, the dispersion of risk has increased by 25 percent.

"As in all things real estate-related, location matters. The increasing variation in defect risk levels among major markets indicates that while the national trend in defect risk is down, that may not be the case in all places," said Fleming. "Where one originates mortgages will have a big impact on their business experience with defect risk. Markets in Texas, Oklahoma and Florida are emerging defect ‘hot spots.’ A gap is growing between the low defect risk ‘cool spots’ and the high defect risk ‘hot spots.’"

Next Release

The next release of the First American Loan Application Defect Index will be posted on November 24, 2015. 

Methodology

The methodology statement for the First American Loan Application Defect Index is available at http://www.firstam.com/economics/defect-index.

Disclaimer

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. © 2015 by First American. Information from this page may be used with proper attribution. 

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 $4.7 billion in 2014, 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

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