Seven-Month Loan Defect Risk Trend Takes a Break, According to First American Loan Application Defect Index

Rising rates may reduce overall mortgage affordability and incent borrowers to consider adjustable-rate mortgages, but the product shift isn’t likely to impact defect, fraud and misrepresentation risk, says Chief Economist Mark Fleming


August 31, 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 July 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.

July 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same in July 2017 as compared with the previous month.
  • Compared to July 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 increased 1.4 percent month-over-month, and is 20.3 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

“Finally, after seven consecutive months of increasing defect, fraud, and misrepresentation risk, no change compared to last month is welcome news,” said Mark Fleming, chief economist at First American. “In particular, purchase transactions, which are inherently more at risk of defects, fraud and misrepresentation, showed no increase compared to a month ago. One month doesn’t establish a trend, so it will be important to see if we’ve reached a turning point in the long-run trend of increasing defect risk.”

Will The Fed’s Actions in September Increase Loan Defect Risk?

“In September, the Federal Open Market Committee (FOMC) may act again to push interest rates higher,” said Fleming. “Historically, when mortgage rates increase, more borrowers consider adjustable-rate mortgages with lower rates instead of more traditional fixed-rate mortgages to maintain purchasing power.

“An adjustable-rate mortgage can be a good alternative to a fixed-rate mortgage in a rising rate environment, but they have historically had more fraud and misrepresentation risk,” said Fleming. “Yet, this year the risk gap has closed. Rates may rise and adjustable-rate mortgages may be more attractive, but the Fed’s actions won’t impact loan defect risk.”

Additional Quotes from Chief Economist Mark Fleming

  • “Analysis of defect, fraud and misrepresentation risk trends for adjustable- and fixed-rate mortgages shows that, prior to this year, adjustable-rate mortgages have been riskier, sometimes significantly.”
  • “In 2017, while risk has been increasing for both loan types, fixed-rate mortgage risk has closed the gap. Currently, the defect risk for both adjustable- and fixed-rate mortgages is approximately the same.”
  • “Rising rates may reduce overall mortgage affordability and incent borrowers to consider adjustable rate mortgages, but the product shift isn’t likely to impact defect, fraud and misrepresentation risk.”

June 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+68.5 percent), North Dakota (+54.5 percent), Wyoming (+50.8 percent), North Carolina (+39.4 percent), and Iowa (+33.9 percent).
  • There is no state with a year-over-year decrease in defect frequency.

June 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 (+34.7 percent); Charlotte, N.C. (+28.6 percent); Buffalo, N.Y. (+27.6 percent); and Tampa, Fla. (+25.3 percent).
  • There is one CBSA among the largest 50 CBSAs with a year-over-year decrease in defect frequency: Houston (-1.1 percent).

Next Release

The next release of the First American Loan Application Defect Index will be posted the week of September 25, 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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