Strong Sellers’ Market Sends Defect, Fraud and Misrepresentation Risk Higher for Fourth Straight Month, According to First American Loan Application Defect Index

Loan defect risk is concentrating in attractive local markets where housing demand is the strongest, primarily in the South, says Chief Economist Mark Fleming


April 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 March 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.

March 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 3.9 percent in March 2017 as compared with the previous month.
  • Compared to March 2016, the Defect Index increased by 3.9 percent.
  • The Defect Index is down 22.5 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased 3.3 percent month-over-month, and is 4.5 percent lower than a year ago.
  • The Defect Index for purchase transactions increased 2.4 percent compared to last month, and is up 3.6 percent compared to a year ago.

Chief Economist Analysis: Defect Risk Shifts South for Spring

“This month, the Loan Application Defect Index continued to trend upward as the risk on refinance and purchase transactions both increased compared to a month ago,” said Mark Fleming, chief economist at First American. “After four consecutive months of increased defect risk, it’s fair to call this a trend.

“We are experiencing one of the strongest sellers’ markets in recent memory and the ‘speed-buying’ that is required for home buyers to make an offer and win a bid for homes they like may be contributing to the increase in defect, misrepresentation and fraud risk that we are observing,” said Fleming.

“Defect, fraud and misrepresentation risk is increasingly becoming a regional phenomenon. The risk is concentrating in attractive local markets where housing demand is the strongest, primarily in the South,” said Fleming. “The South may not be so charming anymore if you manage loan fraud and misrepresentation risk.”

Additional Quotes from Chief Economist Mark Fleming

  • “The riskiest markets are increasingly in the South, with elevated risk stretching from Texas to Florida and up to West Virginia.”
  • “The five markets with the highest defect risk in the country are all based in the South: McAllen, Texas; Charleston, S.C.; Tampa, Fla.; Knoxville, Tenn.; and Baton Rouge, La.”
  • “The South is also one of the strongest regions of the country for housing demand. According to the most recent National Association of Realtors (NAR) existing-home sales release, the rate of existing-home sales increased 8.5 percent in March compared to a year ago. Additionally, the median price in the South was up 8.6 percent compared to a year ago.”
  • “Conversely, the Northeast has remained consistently low risk. The markets with the lowest level of defect, fraud and misrepresentation risk in the country are Scranton, Pa.; Toledo, Ohio; Rochester, N.Y.; Albany, N.Y.; and Harrisburg, Pa.”

March 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: Wyoming (+42.4 percent), South Dakota (+37.5 percent), North Dakota (+35.8 percent), Mississippi (+28.6 percent) and West Virginia (+26.8 percent).
  • The five states with the greatest year-over-year decrease in defect frequency are: Connecticut (-8.9 percent), Michigan (-6.1 percent), Oklahoma (-3.3 percent), Delaware (-3.0 percent) and Washington (-2.5 percent).

    March 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. (+28.8 percent); New Orleans (+12.7 percent); Tampa, Fla. (+11.8 percent); Jacksonville, Fla. (+10.8 percent); and Minneapolis (+10.7 percent).
  • Among the largest 50 CBSAs, the five markets with the greatest year-over-year decrease in defect frequency are: Milwaukee (-12.7 percent); Detroit (-12.6 percent); Oklahoma City (-9.2 percent); Louisville/Jefferson, Ky. (-8.8 percent); and Hartford, Conn. (-8.2 percent).

    Next Release

    The next release of the First American Loan Application Defect Index will be posted the week of May 22, 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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