Loan Defect and Fraud Risk Declining Due to Compliance-Related Investments, According to First American Loan Application Defect Index

The investments to improve compliance are producing real benefits in the form of higher quality loan manufacturing processes with fewer defects and less misrepresentation, says Chief Economist Mark Fleming

March 31, 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 February 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.

February Loan Application Defect Index

The First American Loan Application Defect Index decreased 1.3 percent in February as compared with January and decreased by 5.1 percent as compared with February 2015. The Defect Index is down 26.5 percent from the high point of risk in October 2013. The Defect Index has fallen 3.8 percent over the last three months, and February was the seventh consecutive month without an increase in defect and misrepresentation risk. The index is at the lowest point since its inception. Apart from the increases in risk in 2013 and early 2015, the Defect Index has been consistently trending lower since inception.

According to the MBA, loan production expenses have been increasing, which reflects the industry’s investment in technology and improved standards, as well as greater demand for compliant loan production processes. However, one benefit of these investments is declining loan application defect and misrepresentation risk,” said Mark Fleming, chief economist at First American.

The Defect Index for refinance transactions remained unchanged month-over-month, and remains 9.7 percent lower than a year ago. The Defect Index for purchase transactions declined 1.2 percent month-over-month, and is down 4.6 percent compared to a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions continues to decline much more than defect risk for purchase transactions, declining 35.0 percent as compared to 20.2 percent for purchase transactions.

“The continued decline in loan application and mortgage defect risk is indicative of the benefits the industry is accruing from investments in technology and improved production standards,” said Fleming. “The investments to improve compliance are producing real benefits in the form of higher quality loan manufacturing processes with fewer defects and less misrepresentation.”

February 2016 State Highlights

  • The five states with the highest year-over-year increase in defect frequency are: Utah (+9.7 percent), Kentucky (+8.8 percent), South Carolina (+8.6 percent), the District of Columbia (+8.0 percent) and Texas (+5.0 percent).
  • The five states with the highest year-over-year decrease in defect frequency are: Alabama (-17.2 percent), Michigan (-16.2 percent), West Virginia (-15.6 percent), Minnesota (-14.8 percent) and Wyoming (-14.7 percent).

February 2016 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest year-over-year increase in defect frequency are: Louisville, Ky. (+19.1 percent); Salt Lake City (+16.2 percent); Houston (+13.6 percent); Memphis, Tenn. (+9.1 percent); and Austin, Texas (+8.2 percent).
  • Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are: Birmingham, Ala. (-20.2 percent); Detroit (-19.1 percent); Minneapolis (-13.3 percent); Jacksonville Fla. (-12.6 percent); and Raleigh, N.C. (-12.2 percent).

Economic Distress and Application Defect Risk

“As in real estate in general, location is critically important when it comes to understanding loan application defect and fraud risk,” said Fleming. “This month, two states in particular stand out – Florida and Texas.

“Florida is the highest risk state in the nation, and two major metropolitan areas, Miami and Cape Coral, are in the top five among the 100 largest markets in the country. In fact, all nine major markets in Florida are well above the national defect and fraud risk level,” said Fleming. “Texas is the fifth riskiest state, but not far behind Florida. McAllen, Texas is the riskiest market among the top 100, but Austin, Houston and Dallas are also not far behind.

“Texas was very close if not sometimes slightly better than the national average for defect and fraud risk until early 2015 when it rose a dramatic 19 percent in the span of five months ending in September 2015. It should be noted that crude oil prices, particularly West Texas Intermediate collapsed from $106 per barrel in mid-2014 to a low of $30 dollars a barrel this past February,” said Fleming. “The oil price decline has put significant pressure on energy-dependent businesses in many Texas markets. It’s no surprise that the economic distress increases the incentive for loan application misrepresentation, if not necessarily outright loan application fraud.

“Florida has been a perennially high risk state since the loan application defect index started. While it follows the national trend very closely in terms of change, it’s consistently at a higher level. Currently, defect, misrepresentation and fraud risk is 18.7 percent higher than in the nation as a whole,” said Fleming. “The Miami metropolitan area is 28 percent riskier than the nation. Higher than national investment activity as well as larger shares of foreign buyers are contributory factors to elevated risk in many Florida markets.  

“Location matters. Misrepresentation and fraud risk is particularly concentrated among markets in Texas and Florida,” said Fleming. “The challenge in Texas is likely energy-dependent economic distress. In Florida, high-priced housing and the challenges involved in accurately documenting loans for foreign and investment buyers is likely causing our indices to remain consistently elevated.”

Next Release

The next release of the First American Loan Application Defect Index will be posted the week of April 25, 2016.


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. © 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. More information about the company can be found at