Seventh Consecutive Month of Increased Defect, Fraud And Misrepresentation Risk Driven By Shortage of Homes for Sale, According to First American Loan Application Defect Index

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


July 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 June 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.

June 2017 Loan Application Defect Index

  • 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.

Chief Economist Analysis

“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,” said Fleming. “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,” said Fleming.

Rank

Market

Defect Index Value

Year-Over-Year Change

1

Raleigh, N.C.

97

49.2 percent

2

New Orleans

98

25.6 percent

3

Tampa, Fla.

95

23.4 percent

4

Birmingham, Ala.

99

20.1 percent

5

Charlotte, N.C.

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.”

June 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+66.7 percent), North Dakota (+52.2 percent), Wyoming (+46.3 percent), West Virginia (+37.9 percent), and North Carolina (+35.3 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. (+49.2 percent); Charlotte, N.C. (+26.8 percent); New Orleans (+25.6 percent); Tampa, Fla. (+23.4 percent); and San Jose, Calif. (+23.3 percent).
  • There is no CBSA among the largest 50 CBSAs with a year-over-year decrease in defect frequency.

    Next Release

    The next release of the First American Loan Application Defect Index will be posted the week of August 28, 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.

###

myFirstAm®

Access the powerful online services available only at First American.

Sign In
Forgot Username or Password?

Sign Up

Sign up for a myFirstAm® account.

Other Platforms

  • myFirstAm®

    Track orders, calculate fees, and set milestone alerts.

  • FASTWeb

    Title ordering, routing and tracking.

  • AgentNet®

    eJackets, closing protection letters, back title, bulletins and more.

  • DataTree.com

    Access the nation's largest land record database.

  • Home Warranty

    Coverage for a home's major systems and appliances.