Automation of Verification Tools to Drive Risk Improvements in 2017, According to First American Loan Application Defect Index
The Day 1 Certainty initiative at Fannie Mae and incorporation of similar automated verification tools at Freddie Mac are likely to have a significant positive impact on mortgage loan application defect and misrepresentation risk in the next year, says Chief Economist Mark Fleming
December 26, 2016, 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 November 2016, 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.
November 2016 Loan Application Defect Index
- The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, remained unchanged in November as compared with October.
- Compared to November 2015, the Defect Index decreased by 12.8 percent.
- The Defect Index is down 33.3 percent from the high point of risk in October 2013.
- The Defect Index for refinance transactions decreased 3.4 percent month-over-month, and is 16.4 percent lower than a year ago.
- The Defect Index for purchase transactions is unchanged compared to last month, and is down 5.9 percent compared to a year ago.
Chief Economist Analysis: Automation of Verification Tools to Fuel Downward Risk Trend in 2017
“The long and consistent downward trend in loan application defect and misrepresentation risk paused this month, after falling in seven of the last eight months. Yet, I expect the risk trend to continue its downward trajectory in 2017,” said Mark Fleming, chief economist at First American. “The Day 1 Certainty initiative at Fannie Mae and incorporation of similar automated verification tools at Freddie Mac are likely to have a significant positive impact on mortgage loan application defect and misrepresentation risk in the next year.”
“Next year is expected to be a transition year for loan application defect, misrepresentation and fraud risk. Rising rates in the market will drive a transition to more purchases relative to refinances and more adjustable rate mortgages (ARMs) relative to fixed-rate loans,” said Fleming. “All other factors being equal, both of these trends point to increased defect, misrepresentation and fraud risk.”
Additional Quotes from Chief Economist Mark Fleming
- “In a rising mortgage-rate environment, such as what we have experienced since the election, the incentive to choose an ARM over the much more popular fixed-rate mortgage increases.”
- “In a recent Mortgage Bankers Association weekly application survey, the share of ARM applications increased and the rate on an ARM actually declined modestly.
- Currently, according to our defect index, ARMs are about 6 percent riskier than fixed-rate mortgages.”
- “The gap in defect, misrepresentation and fraud risk between ARMs and fixed-rate mortgages has narrowed in the last year, as ARM risk declined 11 percent year-over-year, while fixed-rate mortgage risk has declined at a slower rate of 7.7 percent year-over-year.”
November 2016 State Highlights
- The five states with the highest year-over-year increase in defect frequency are: Maine (+35.4 percent), South Dakota (+18.0 percent), Montana (+17.4 percent), Vermont (+13.9 percent), and Wyoming (+12.9 percent).
- The five states with the highest year-over-year decrease in defect frequency are: Michigan (-20.5 percent), California (-19.7 percent), Oklahoma (-17.2 percent), New Mexico (-17.1 percent), and Florida (-17.0 percent).
November 2016 Local Market Highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), the only market with a year-over-year increase in defect frequency is: St. Louis (+4.2 percent).
- Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are: Louisville/Jefferson, Ky. (-29.3 percent); Detroit (-26.0 percent); Oklahoma City (-25.8 percent); Sacramento, Calif. (-25.3 percent); and Miami (-23.3 percent).
The next release of the First American Loan Application Defect Index will be posted the week of January 23, 2017.
The methodology statement for the First American Loan Application Defect Index is available at http://www.firstam.com/economics/defect-index.
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. © 2016 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 $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.