Defect, Fraud and Misrepresentation Risk Heats Up to Levels Not Seen Since 2015, According to First American Loan Application Defect Index

The purchase-pivot in the housing market continues add fuel to the fire of the overall level of application, defect and fraud risk, says Chief Economist Mark Fleming


June 28, 2017, 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 May 2017, which estimates the frequency of defects, fraudulence and misrepresentation 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.

May 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 2.5 percent in May 2017 as compared with the previous month.
  • Compared to May 2016, the Defect Index increased by 13.7 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased 3.0 percent month-over-month, and is 9.7 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent compared to last month, and is up 11.1 percent compared to a year ago.

Chief Economist Analysis: Defect Risk “Heat Wave” Fries Several Southern Markets

“The Loan Application Defect Index is now reaching levels of risk not seen since 2015,” said Mark Fleming, chief economist at First American. “While risk is growing in both purchase and refinance transactions, it is important to recognize that loan application defect, fraud and misrepresentation risk remains below the peak reached in 2013. Purchase transaction risk is 13 percent below the peak and refinance transaction risk is 32 percent below the peak. The purchase-pivot in the housing market continues to add fuel to the fire of the overall level of application, defect and fraud risk.”

Additional Quotes from Chief Economist Mark Fleming

“Given the heat wave gripping many parts of the country, this month I am highlighting the loan application defect risk ‘heat wave’ frying several markets in the South, according to the Loan Application Defect Index,” said Fleming.

Rank

Market

Defect Index Value

Year-Over-Year Change

1

McAllen, Texas

106

10.4 percent

2

Charleston, S.C.

100

12.4 percent

3

Birmingham, Ala.

98

18.1 percent

4

Knoxville, Tenn.

98

22.5 percent

5

Augusta, Ga.

96

35.2 percent

 

“These hot spots for loan defect risk are getting hotter, as the risk in these markets is increasing significantly. The defect risk in each market has increased by a minimum of at least 10 percent in the past year,” said Fleming. “Southern markets are experiencing some of the strongest growth in housing demand, as people seek the lower cost of living compared to northeastern and western markets. Where there’s smoking demand, the flames of defect risk typically follow.”

May 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+56.4 percent), North Dakota (+50.0 percent), Wyoming (+40.9 percent), West Virginia (+35.6 percent), and Iowa (+34.4 percent).
  • There is no state with a year-over-year decrease in defect frequency.

    May 2017 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are: Raleigh, N.C. (+39.4 percent); Tampa, Fla. (+21.8 percent); Buffalo, N.Y. (+21.3 percent); New Orleans (+20.5 percent); and Charlotte, N.C. (+19.2 percent).
  • Among the largest 50 CBSAs, the only two markets with a decrease in defect frequency are: Oklahoma City (-4.7 percent) and Milwaukee (-1.3 percent).

    Next Release

    The next release of the First American Loan Application Defect Index will be posted the week of July 24, 2017.

    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. © 2017 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 total revenue 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 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

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