First American Loan Application Defect Index Falls 2.5 Percent in October

—Ability-to-Pay rules are reducing income-related fraud risk as intentionally misrepresenting one’s income for fraudulent gain is more likely to be caught, says Chief Economist Mark Fleming—

November 24, 2015, 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 October 2015, 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.

October 2015 Loan Application Defect Index

The First American Loan Application Defect Index fell 2.5 percent in October as compared with September and decreased by 10.2 percent as compared with October 2014. The Defect Index, which reflects estimated mortgage loan defect rates over time, by geography and by loan type, is down 22.3 percent from the high point of risk in October 2013.

This is the third month-over-month decline in a row of defect and misrepresentation risk, returning the Defect Index to the level of April 2015 and reversing the upward trend in the first half of the year. The Defect Index has fallen more than six percent over the last three months. The index is up 1.3 percent from the low point for defect risk set in March 2015, yet remains well below the level of defect risk observed throughout most of the historical series.

The Defect Index for refinance transactions declined 2.8 percent month-over-month, and is now 10.4 percent lower than a year ago. The Defect Index for purchase transactions improved 2.3 percent month-over-month, and is down 10.5 percent compared to a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions has declined much more than defect risk for purchase transactions, declining 31 percent as compared to 18.3 percent for purchase transactions.

“Fraudulent and misrepresentative loan applications are continuing to decline, as our risk index is trending toward the lowest point we have recorded in the last five years. The reduction in risk is occurring across property type, occupancy, loan purpose, and whether a conforming conventional or FHA, VA, USDA loan,” said Mark Fleming, chief economist at First American. “While risk is declining overall, there are still categories of loans that are riskier. In particular, self-reported investor, ARM, purchase, and multi-unit transactions have heightened defect, fraud, and misrepresentation risk.”

October 2015 State Highlights

  • The five states with the highest month-over-month increase or smallest decrease in defect frequency are: North Dakota (+3.3 percent), Alaska (+0.0 percent), Iowa (+0.0 percent), and Missouri (+0.0 percent) and Illinois (-1.3 percent).
  • The five states with the highest month-over-month decrease in defect frequency are: Michigan (-6.1 percent), Vermont (-5.2 percent), California (-4.9 percent), Louisiana (-4.9 percent) and Connecticut (-4.8 percent).

October 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: Kansas City, Mo. (+1.4 percent); Winston, N.C. (+1.4 percent); Augusta, Ga. (+1.3 percent); Albany, N.Y. (+0.0 percent); and Birmingham, Ala. (+0.0 percent).
  • Among the largest 50 CBSAs, the five markets with the highest month-over-month decrease in defect frequency are: Scranton, Pa. (-10.6 percent); Detroit (-7.3 percent); Buffalo, N.Y. (-6.8 percent); Toledo, Ohio (-6.5 percent); and Virginia Beach, Va. (-6.3 percent).

New Measures by Risk Category

This month, we have continued to expand the Defect Index by including two new risk categories – employment and income defect, fraud and misrepresentation. Risk of misrepresentation and fraud in particular can occur by intentionally misrepresenting information on different parts of the mortgage loan application. By focusing indices on specific subsets of the loan application, we are able to isolate and measure different categories of defect risk. Employment-related application defects and potential misrepresentation has remained very stable over time, with a recent increase and subsequent decrease mirroring the overall trend in the Defect Index. On the other hand, income misrepresentation has consistently trended downward since the end of 2012.

“One of the clearest benefits of more stringent underwriting standards related to the ability of a borrower to sustainably pay their mortgage can clearly be seen in the improvement in the income-specific defect risk index. Income-related defect, misrepresentation and fraud risk is down 49 percent from its peak in December 2012,” said Fleming. “Given the heightened scrutiny of a borrower’s ability to pay, intentionally misrepresenting one’s income for fraudulent gain is more likely to get caught.”

Next Release

The next release of the First American Loan Application Defect Index will be posted on December 22, 2015.


The methodology statement for the First American Loan Application Defect Index is available at


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


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