Defect, Fraud and Misrepresentation Risk Rises Modestly on Shift Toward Purchase-Dominated Market, According to First American Loan Application Defect Index
Risk is always relative. Even the highest risk markets today are well below the risk levels of many markets in 2011, says Chief Economist Mark Fleming.
January 26, 2017, 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 December 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.
December 2016 Loan Application Defect Index
- The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 1.5 percent in December as compared with November.
- Compared to December 2015, the Defect Index decreased by 9.2 percent.
- The Defect Index is down 32.4 percent from the high point of risk in October 2013.
- The Defect Index for refinance transactions increased 1.8 percent month-over-month, and is 13.6 percent lower than a year ago.
- The Defect Index for purchase transactions increased 1.3 percent compared to last month, and is down 3.6 percent compared to a year ago.
Chief Economist Analysis: Defect Risk Ticks Higher as Shift to Purchase Market Accelerates
“This month, the Loan Application Defect Index moved modestly higher on increases in risk for purchase and refinance applications, in combination with the continuing shift toward a purchase-dominated market,” said Mark Fleming, chief economist at First American. “One month’s change doesn’t necessarily signal a trend, but it bears watching to see if defect risk rises again next month. However, the prospect of rising loan application defect risk may be countered in 2017 by the market’s continued adoption of validation tools early in the loan application process, which create more certainty in application data.”
Risk is Always Relative and Depends on Location
“The national level of loan application, defect and fraud risk hides the underlying differences across markets. Some markets have more risk than the national level, and some less,” said Fleming. “Location matters. Our dispersion index measures the amount of variation in risk levels among the top 100 markets.
“Defect, fraud and misrepresentation risk dispersion, while increasing modestly month-over-month, remains well below the peak in 2011. In particular, we have seen marked reductions over time in the number of markets with highly elevated risk and the magnitude of risk in those markets,” said Fleming. “Risk is always relative. Even the highest risk markets today are well below the risk levels of many markets in 2011.”
Additional Quotes from Chief Economist Mark Fleming
- “Dispersion of loan application, defect and fraud risk among the top 100 markets increased 4.3 percent in December as compared with November.”
- “Compared to December 2015, risk dispersion decreased by 5.2 percent.”
- “The dispersion of risk across major markets is down 33.0 percent from the high point in July 2011.”
- “All the top 100 markets have less defect, misrepresentation and fraud risk than in January 2011, the starting point for Defect Index data.”
- “Today’s riskiest markets – McAllen, Texas and Tampa, Fla. – have been below the national benchmark of 100 since December 2015 and July 2014, respectively.”
December 2016 State Highlights
- The five states with the highest year-over-year increase in defect frequency are: Montana (+25.8 percent), Wyoming (+25.0 percent), Maine (+24.0 percent), North Dakota (+21.3 percent), and South Dakota (+20.0 percent).
- The five states with the highest year-over-year decrease in defect frequency are: Michigan (-17.6 percent), California (-17.3 percent), Rhode Island (17.1 percent), Maryland (-13.3 percent), and Oklahoma (-13.2 percent).
December 2016 Local Market Highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), the four markets with year-over-year increase in defect frequency is: Raleigh, N.C. (+11.6 percent), St. Louis (+11.6 percent), Birmingham, Ala. (+3.6 percent), and Tampa, Fla. (+2.2 percent).
- Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are: Louisville/Jefferson, Ky. (-25.9 percent); Detroit (-23.9 percent); Oklahoma City (-21.6 percent); Sacramento, Calif. (-21.1 percent); and Miami (-20.0 percent).
The next release of the First American Loan Application Defect Index will be posted the week of February 20, 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.