Shift to Accommodate Millennial Home Buying Preferences Reduces Loan Application Defect Risk, According to First American’s Loan Application Defect Index

The investment in technology to better serve millennial first-time homebuyers also helped make the manufacture and underwriting of mortgage loans less risky, says Chief Economist Mark Fleming


July 31, 2018, 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 2018, 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 loan type. It is 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, and can provide state- and market-specific comparisons of mortgage loan defect levels. 

June 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 3.8 percent compared with the previous month.

  • Compared to June 2017, the Defect Index decreased by 8.3 percent.

  • The Defect Index is down 24.5 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions is down 2.8 percent compared with the previous month, and is 1.4 percent lower than a year ago.

  • The Defect Index for purchase transactions decreased by 3.6 percent compared with the previous month, and is down 12.1 percent compared with a year ago.   

Chief Economist Analysis: How Millennial Home Buying Expectations Unintentionally Reduced Loan App Defect Risk

“As the mortgage market has continued its transition away from refinances to a predominantly purchase-oriented loan market, the Defect Index for purchase transactions has continued to decline, dropping 3.6 percent in the last month and 12.1 percent in the last year,” said Mark Fleming, chief economist at First American. “This officially marks a six-month long decline in defect, fraud and misrepresentation and risk on purchase transactions, which have traditionally been considered higher risk.

“Not only is the national trend positive, but loan application defect, fraud and misrepresentation risk is declining in practically every market in the nation,” said Fleming. “Only five major metropolitan markets experienced an increase in overall defect, fraud and misrepresentation risk compared with a year ago. Many markets experienced significant declines of 10 percent or more.  

“Is millennial demand for homeownership behind this trend? In addition to their desire to be homeowners, millennials also expect a convenient, digital, highly automated and all-around better home-buying experience. The mortgage finance industry has invested heavily in technology to meet this demand to compete for millennials’ mortgage loan business,” said Fleming. “The technology investment that has occurred in the mortgage industry in recent years to better serve millennial first-time home buyers also helped make the manufacture and underwriting of mortgage loans less risky with fewer defects and misrepresentation on loan applications. Sometimes, unintended consequences aren’t so bad.” 

June 2018 State Highlights

  • The three states with a year-over-year increase in defect frequency: California (+1.3 percent), Virginia (+1.3 percent) and New Mexico (+1.2 percent).

  • The five states with the greatest year-over-year decrease in defect frequency are: South Carolina (-25.0 percent), Vermont (-21.8 percent), Minnesota (-19.5 percent), Alabama (-19.1 percent) and North Carolina (-17.4 percent). 

    June 2018 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: Virginia Beach, Va. (+15.6 percent), Los Angeles (+12.0 percent), Orlando, Fla. (+8.4 percent), San Diego (+7.5 percent), and Memphis, Tenn. (+3.9 percent).

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are: Birmingham, Ala. (-26.3 percent), Raleigh, N.C. (-23.7 percent), Minneapolis (-20.9 percent), Austin, Texas (-20.9 percent), and Pittsburgh (-20.5 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of August 27, 2018. 

    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. © 2018 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; banking, trust and wealth management services; and other related products and services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com

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