Florida Cities Pace the Nation in Declining Fraud Risk, According to First American’s Loan Application Defect Index

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 2019, 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 2019 Loan Application Defect Index

• The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 7.0 percent compared with the previous month.

• Compared to June 2018, the Defect Index increased by 3.9 percent.

• The Defect Index is down 21.6 percent from the high point of risk in October 2013.

• The Defect Index for refinance transactions decreased by 6.5 percent compared with the previous month, and is up 4.3 percent compared with a year ago.

• The Defect Index for purchase transactions decreased by 7.8 percent compared with the previous month, and is up 3.8 percent compared with a year ago.   

Chief Economist Analysis: Fraud Risk for Purchase Transactions Declines for Third Straight Month

“This month, the Loan Application Defect Index for purchase transactions continued its downward trend, declining 7.8 percent in June compared with the month before, the third consecutive month defect risk in purchase transactions has fallen,” said Mark Fleming, chief economist at First American. “The Defect Index for refinance transactions also fell 6.5 percent compared with the previous month. The overall Defect Index, which includes both purchase and refinance transactions, fell 7.0 percent compared with last month, but remains 3.9 percent higher than one year ago. Yet, is declining loan application misrepresentation, defect and fraud risk isolated to a few markets, or is the trend more geographically broad based?” 

Florida Cities Lead the Charge

“The Defect Index also measures loan application misrepresentation, defect and fraud risk over time in 50 of the largest markets in the U.S.,” said Fleming. “Florida cities claimed four of the top six spots among the top cities where fraud risk declined the most on an annual basis: Jacksonville (-15.1 percent), Tampa (-11.5 percent), Orlando (-11.1 percent), and Miami (-7.3 percent). At the state level, Florida ranked second for the greatest year-over-year decline in fraud risk (-6.7 percent). 

“This is a deviation from the norm, as Florida has historically exhibited a relatively greater concentration of fraud risk due to some characteristics of the Florida housing market. Florida tends to have a higher percentage of investor-owned properties, which have a higher propensity for fraud risk,” said Fleming. “Indeed, according to the Defect Index in June 2019, applications for investment properties were 24 percent riskier than for owner-occupied properties, and applications for multi-unit properties, a popular purchase for investors, were 11 percent more likely to contain defects than applications for single-family homes.

“Another possible explanation for why transactions involving investor-owned properties tend to carry greater fraud risk is that investors can claim they are purchasing a property as a second home (to capitalize on lower rates), when they actually plan to rent it out as an investment property,” said Fleming. “High levels of income misrepresentation and undisclosed mortgage debt have also been a reason for the particularly high levels of fraud risk concentrated in Florida.”

“Additionally, according to data from DataTree by First American, the number of condo existing-home sales has fallen in Miami, Orlando, and Tampa compared with last year. Statewide, condo existing-home sales in Florida have fallen nearly 14 percent compared with one year ago, which is counter to the national trend,” said Fleming. “Loan applications for condos and multi-family properties have historically been riskier than single-family properties, so fewer condo and multi-family transactions may help explain the decline in fraud risk in Florida.

“While there are several possible explanations for the decline in fraud in Florida markets, there is one phenomenon that is working to reduce fraud in every market – the decline of the sellers’ market,” said Fleming. “As mortgage rates fall and the strong labor markets persists, potential home buyers feel less pressure to misrepresent information on a loan application. As the saying goes – a rising tide lifts all boats – and Florida is getting a bit of an extra lift this month.” 

June 2019 State Highlights

• The five states with a year-over-year increase in defect frequency are: Nebraska (+34.8 percent), Iowa (+25.7 percent), New York (+25.3 percent), Pennsylvania (+19.7 percent), and Rhode Island (+19.1 percent).

• The five states with a year-over-year decrease in defect frequency are: Arkansas (-10.3 percent), Florida (-6.7 percent), Vermont (-5.1 percent), Utah (-4.8 percent), and Arizona (-4.0 percent). 

June 2019 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: Buffalo, N.Y. (+31.1 percent), Pittsburgh (+25.9 percent), New York (+16.9 percent), New Orleans (+16.9 percent), and San Jose, Calif. (+14.5 percent).

• Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with year-over-year decrease in defect frequency are: Houston (-16.7 percent), Jacksonville, Fla. (-15.9 percent), San Diego (-15.1 percent), Tampa, Fla. (-11.5 percent), and Orlando, Fla. (-11.1 percent). 

  Next Release

  The next release of the First American Loan Application Defect Index will take place the week of August 26, 2019. 

  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. © 2019 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 $5.7 billion in 2018, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2019, First American was named to the Fortune 100 Best Companies to Work For^® list for the fourth consecutive year. More information about the company can be found at www.firstam.com.