Defect Risk Declines Nationally, According to First American’s Loan Application Defect Index

However, there are regions with the potential for higher defect risk due to the impact from natural disasters, says Chief Economist Mark Fleming


December 3, 2018, 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 2018, 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 loan type. It is 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, and can provide state- and market-specific comparisons of mortgage loan defect levels. 

October 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 1.3 percent compared with the previous month.

  • Compared to October 2017, the Defect Index decreased by 4.8 percent.

  • The Defect Index is down 22.5 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions increased by 1.4 percent compared with previous month and is up 2.9 percent compared with a year ago.

  • The Defect Index for purchase transactions increased by 2.5 percent compared with the previous month and is down 8.9 percent compared with a year ago.   

Chief Economist Analysis: Rising Mortgage Fraud Risk Linked to Wildfires

“While the overall risk of loan application defects, fraud and misrepresentation declined from a year-over-year perspective, there are regions with the potential for higher defect risk due to the impact from natural disasters – specifically, the communities impacted by recent wildfires in California,” said Mark Fleming, chief economist at First American. “The Camp Fire wildfire in Butte county, which has been named the deadliest U.S. wildfire in a century, and the Woolsey Fire in Los Angeles and Ventura counties, are some of the worst wildfires in the state’s history.

“In addition to the devastating impact on human life, the likely damage to housing is staggering. According to the California Department of Forestry and Fire Protection, the Camp Fire destroyed 13,972 residences and Woolsey Fire destroyed 1,500 structures,” said Fleming. “While it’s too early to estimate the cost of the damage from these fires, the Associated Press recently reported that wildfires in Northern California last year ‘gutted 6,800 homes and resulted in $12.6 billion in insured losses.’ Since the damage from the recent wildfires greatly exceeded the 2017 wildfire damages, we can expect a higher estimate in losses.

“Unfortunately, on top of the damage to thousands of homes, historical data indicates that natural disasters and loan application defect risk go hand-in-hand,” said Fleming. “As we’ve seen too often, natural disasters create the potential and opportunity for significant misrepresentation of collateral condition.

“In the aftermath of the December 2017 Thomas Fire in Ventura and Santa Barbara counties, mortgage defect, fraud and misrepresentation risk, as measured by the Defect Index, increased 10 percent in one month in the Oxnard-Thousand Oaks-Ventura metropolitan area,” said Fleming. “Fraud and misrepresentation risk remained elevated for five months after the wildfire, before trending down again. Defect, fraud and misrepresentation risk in the Oxnard metropolitan area, which had been declining prior to the Thomas Fire, has yet to return to pre-wildfire levels.” 

Fraud Risk in California Likely to Increase in the Months Ahead

“While the devastating impacts from the wildfires in California continue to be assessed, the risk of mortgage loan application fraud in the communities impacted is likely to increase in the coming months,” said Fleming. “The Defect Index in Los Angeles has trended down in recent months, while Oxnard has experienced a relatively flat trend in fraud risk following the post-Thomas Fire surge. Given historical trends, it’s fair to expect increases in defect and fraud risk in these affected markets in the near future.” 

October 2018 State Highlights

  • The five states with a year-over-year increase in defect frequency are: Alaska (+16.9 percent), Hawaii (+9.8 percent), California (+8.1 percent), Wyoming (+7.4 percent), and Maine (+6.9 percent).

  • The five states with the greatest year-over-year decrease in defect frequency are: Vermont (-22.9 percent), Minnesota (-19.8 percent), Arkansas (-15.2 percent), Alabama (-14.7 percent), and Arizona (-14.3 percent). 

    October 2018 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are: San Diego (+16.0 percent), Los Angeles (+12.5 percent), Memphis, Tenn. (+10.5 percent), Buffalo, N.Y. (+10.4 percent), and Richmond, Va. (+10.1 percent).

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are: Minneapolis (-22.9 percent), Birmingham, Ala. (-17.3 percent), Columbus, Ohio (-15.1 percent), St. Louis (-14.6 percent), and Las Vegas (-14.5 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of December 24, 2018. 

    Methodology

    The methodology statement for the First American Loan Application Defect Index is available at http://www.firstam.com/economics/defect-index

    Disclaimer

    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. © 2018 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; banking, trust and wealth management services; and other related products and services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com

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