Mortgage Defect And Fraud Risk Declining In Super Tuesday States, According To First American Loan Application Defect Index

- Defect and fraud risk in loan applications is an impediment to sustainable credit expansion and potentially limits access to the American Dream for those who could benefit most, says Chief Economist Mark Fleming -

February 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 January 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.

January Loan Application Defect Index

The First American Loan Application Defect Index remained unchanged in January as compared with December and decreased by 5.0 percent as compared with January 2015. The Defect Index is down 25.5 percent from the high point of risk in October 2013.

The Defect Index has fallen 3.8 percent over the last three months, and January was the sixth consecutive month without an increase in defect and misrepresentation risk. The index remains at its lowest point since its inception. While it’s difficult to know what a normalized level of defect risk is, the index value of 76 is significantly lower than in the three years between 2011 and 2013, when the index was consistently above a value of 90.

The Defect Index for refinance transactions declined another 1.5 percent month-over-month, and is now 9.7 percent lower than a year ago. The Defect Index for purchase transactions remained unchanged month-over-month, and is down 4.5 percent compared to a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions continues to decline much more than defect risk for purchase transactions, declining 35.0 percent as compared to 19.2 percent for purchase transactions.

"We are excited about the further clarification to the market by the Federal Housing Finance Agency that the GSEs will use an independent dispute resolution (IDR) process to resolve repurchase disputes as a result of loan application defects and fraud," said Mark Fleming, chief economist at First American. "Based on the improving defect and fraud risk profile of recent loan applications, we expect the need for the IDR process to decline in the coming years as well."

January 2016 State Highlights

  • The five states with the highest year-over-year increase in defect frequency are: South Carolina (+13.9 percent), the District of Columbia (+10.8 percent), Kentucky (+7.2 percent), Utah (+5.3 percent) and Texas (+4.9 percent).
  • The five states with the highest year-over-year decrease in defect frequency are: South Dakota (-19.7 percent), Wyoming (-18.1 percent), Michigan (-17.6 percent), Maine (-17.6 percent) and Minnesota (-16.7 percent).

January 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. (+20.6 percent); Houston (+12.0 percent); Salt Lake City (+9.7 percent); Memphis, Tenn. (+7.2 percent); and Austin, Texas (+5.7 percent).
  • Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are: Detroit (-21.1 percent); Birmingham, Ala. (-18.2 percent); Minneapolis (-16.1 percent); Cincinnati (-14.8 percent); and Riverside, Calif. (-13.4 percent).

Super Tuesday Loan Application Defect Risk

"As Super Tuesday fast approaches on March 1, and with its likely important implications for the summer conventions of both the Democrats and Republicans, we consider the state of defect, fraud and misrepresentation risk in the major Super Tuesday states – Alabama, Alaska, Arkansas, Colorado, Georgia, Massachusetts, Minnesota, North Dakota, Oklahoma, Tennessee, Texas, Vermont, Virginia and Wyoming," said Fleming. "In other words, how risky are mortgage loan applications in the Super Tuesday states?

"Only three of the 14 Super Tuesday states have increasing year-over-year defect risk – Texas, Oklahoma and Virginia – with risk increases of 4.9 percent, 4.7 percent, and 2.9 percent respectively," said Fleming. Yet, even though defect risk is increasing in Texas and Virginia and these states have large populations relative to most of the other Super Tuesday states, in aggregate defect and fraud risk in Super Tuesday states is declining on a year-over-year basis.

"While housing and homeownership have received little attention on the campaign trail, it is critically important to wealth creation, particularly for the majority of lower- and middle-class Americans," added Fleming. "Even though defect and fraud risk in loan applications is declining overall in Super Tuesday states, rising misrepresentation and fraud risk in key states like Texas only serve to remind us of the importance of safeguarding the mortgage market against fraud to protect the American Dream for those who could benefit most."

Next Release

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