Elevated Risk for Identity- and Collateral-Based Fraud, According to First American Loan Application Defect Index

Hurricanes, and particularly the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition, says Chief Economist Mark Fleming


September 29, 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 August 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.

August 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same in August 2017 as compared with the previous month.
  • Compared to August 2016, the Defect Index increased by 20.0 percent.
  • The Defect Index is down 17.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions decreased 1.4 percent month-over-month, and is 18.6 percent higher than a year ago.
  • The Defect Index for purchase transactions remained the same compared to last month, and is up 15.2 percent compared to a year ago.

Chief Economist Analysis: Data Breaches Increase Identity-Based Fraud Risk

“Last month, we reported that for the first time in 2017 the Loan Application Defect Index didn’t rise, but we advised caution in interpreting the one-month trend,” said Mark Fleming, chief economist at First American. “In August, the overall risk of defects, fraud and misrepresentation again didn’t change. It’s a positive sign that loan application risk has remained stable for two consecutive months, but given the recent high-profile data breaches that exposed the personal credit information of many U.S. consumers, the risk of identity-based fraud and misrepresentation is certainly elevated.”

Natural Disasters Create Fraud Risk Opportunity

“The devastating impact of Hurricanes Harvey and Irma on large parts of Texas and most of Florida continues to be assessed. Thankfully, recovery efforts are well underway and the rebuilding of homes has started,” said Fleming. “Yet, it should come as no surprise that in the wake of major natural disasters the risk of mortgage loan application fraud increases.

“Hurricanes, and particularly the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition,” said Fleming. “Evidence from monitoring application defect, misrepresentation and fraud risk after Sandy in the New York metropolitan area indicates that one should be on the lookout for increased risk in the markets impacted Harvey and Irma.”

Additional Quotes from Chief Economist Mark Fleming

  • “In the aftermath of Hurricane Sandy, which impacted the New York City area in late October 2012, mortgage fraud, misrepresentation and defect risk based on the Defect Index increased 16.5 percent over four months in the New York metropolitan area.”
  • “Fraud and misrepresentation risk remained elevated for an entire year after the hurricane, before returning to a level consistent with the national index in late 2013.”
  • “The greater Houston and Tampa Bay markets were both significantly impacted by the recent hurricanes and will be markets to watch closely in the coming months for fraud and misrepresentation risk, especially related to collateral condition.”

August 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+56.1 percent), Wyoming (+50.8 percent), North Dakota (+50.7 percent), North Carolina (+39.4 percent), and New Mexico (+39.1 percent).
  • There is no state with a year-over-year decrease in defect frequency.

    August 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. (+54.0 percent); New Orleans (+32.4 percent); Tampa, Fla. (+25.7 percent), Las Vegas (+24.6 percent); and Oklahoma City (+24.3 percent).
  • There is one CBSA among the largest 50 CBSAs with a year-over-year decrease in defect frequency: Houston (-6.7 percent).

    Next Release

    The next release of the First American Loan Application Defect Index will be posted the week of October 30, 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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