First American Loan Application Defect Index Falls 2.4 Percent In August

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 August 2015, which estimates the frequency of defects 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-level comparisons of levels of mortgage loan defects.

August 2015 Loan Application Defect Index

The First American Loan Application Defect Index, which estimates the frequency of defects in the information submitted in mortgage loan applications, fell 2.4 percent in August as compared with July and decreased by 8.9 percent as compared with August 2014. The Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type, is down 19.6 percent from the high point of risk in October 2013.

Even though there was a slight improvement this month, overall the Defect Index has been consistently trending toward increased risk since the series low point in March 2015.  The index is up 5 percent from the trough, yet remains well below the level of defect risk observed throughout most of the historical series. Whether this month’s improvement is the reversal of the trend toward increased risk will be determined in the coming months.

The Defect Index for refinance transactions had no change month-over-month, and is now 10 percent lower than a year ago. The Defect Index for purchase transactions improved 3.3 percent month-over-month, and is down 7.4 percent compared to a year ago. Since the peak in late 2013 of both purchase and refinance transactions, defect risk on refinance transactions has decreased much more than defect risk for purchase transactions, declining 28 percent as compared to 15.4 percent for purchase transactions.

"While nationally, defect risk has been increasing throughout the homebuying season, this month’s index moved counter-trend toward less risk. Purchase, investor, adjustable-rate and non-single-family transaction types are all more risky than their category alternatives. Defect risk continues to be concentrated in markets in Texas, Florida and Michigan," said Mark Fleming, chief economist at First American. "Nonetheless, given the increasing number of homes lost to wildfires in California, we are monitoring these natural disaster impacted markets closely for any increase in fraud-related defect risk."

August 2015 State Highlights

• The five states with the highest month-over-month increase in defect frequency are: Oklahoma (+3.0 percent), Rhode Island (+1.3 percent), Hawaii (+1.1 percent), Texas (+1.0 percent) and Alaska (+0.0 percent).
• The five states with the highest month-over-month decrease in defect frequency are: West Virginia (-7.6 percent), Delaware (-6.7 percent), Massachusetts (-6.6 percent), Wyoming (-6.0 percent) and Vermont (-6.0 percent).

August 2015 Local Market Highlights

• Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest month-over-month increase in defect frequency are: Oklahoma City, Okla. (+3.2 percent); Austin, Texas (+2.9 percent); Houston (+2.0 percent); San Jose, Calif. (+1.4 percent); and Louisville, Ky. (+1.2 percent).
• Among the largest 50 CBSAs, the five markets with the highest month-over-month decrease in defect frequency are: Boston (-6.8 percent); Nashville, Tenn. (-4.7 percent); New Orleans (-4.2 percent); Memphis, Tenn. (-3.8 percent) New York (-3.6 percent).

Market Close Up: Fraudulent Wildfire Lending in California

Currently, California as a whole has defect risk below the national average. In fact, Stockton was the only market in California with defect risk above the national average in August. However, as wildfires continue to burn in California and the number of homes destroyed continues to grow, the risk of fraudulent defects increases in the impacted areas. Historically, natural disasters increase the risk of collateral-related fraud schemes as damaged or completely destroyed properties are refinanced or sold to straw buyers, and lenders are left with properties of little or no worth. 

"Because the opportunity for collateral-based fraud schemes increases after a natural disaster, we are turning our attention to wildfire impacted areas in the west, and California in particular. We’ve learned from natural disasters, such as Hurricanes Katrina and Sandy, that the incentive and opportunity to conduct mortgage fraud increases when property is damaged and destroyed," said Fleming. "Given the large number of homes impacted by wildfires this year, we will monitor this particularly costly form of mortgage defect closely in the next few months."

Next Release

The next release of the First American Loan Application Defect Index will be posted on October 28, 2015.

Methodology

The First American Loan Application Defect Index estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard^® system. The index is based on the frequency with which defect indicators are identified.  The Defect Index moves higher as greater numbers of defect indicators are identified. An increase in the index indicates a rising level of loan application defects. The index, nationally and in all markets, is benchmarked to a value of 100 in January 2011. Therefore, all index values can be interpreted as the percentage change in defect frequency relative to the defect frequency identified nationally in January 2011.

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. © 2015 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 revenues of $4.7 billion in 2014, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at http://www.firstam.com/.