Loan Application Defect Risk in the Ability-to-Repay Era, According to First American’s Loan Application Defect Index
The ancillary benefit of the ability-to-repay standards has been fewer loan application defects and a ‘steering wheel lock’ on mortgage fraud risk, says Chief Economist Mark Fleming
May 30, 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 April 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.
April 2018 Loan Application Defect Index
The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same compared with the previous month.
Compared with April 2017, the Defect Index increased by 1.2 percent.
The Defect Index is down 19.6 percent from the high point of risk in October 2013.
The Defect Index for refinance transactions increased by 1.4 percent compared with the previous month, and is 7.6 percent higher than a year ago.
The Defect Index for purchase transactions decreased by 2.2 percent compared with the previous month, and is up 2.2 percent compared with a year ago.
Chief Economist Analysis: Income-Specific Loan App Defect Risk Crashes Since December 2012
“In January of 2013, the mortgage industry witnessed the birth of a new income-underwriting era. The Consumer Finance Protection Bureau (CFPB) published new requirements for mortgage lenders to carefully assess a consumer’s ability to repay their mortgage loan. The new standards were dubbed the “ability-to-repay” rules and were set to take effect one year later in January 2014,” said Mark Fleming, chief economist at First American.
“The 'ability-to-repay' rules were intended to discourage the use of high-risk stated income loans that were common during the housing boom. The new rules also required lenders to strengthen the mortgage loan manufacturing and underwriting practices associated with the determination of a consumer’s ability to repay,” said Fleming. “But, what impact did the ability-to-repay rules have on loan application misrepresentation, defect and fraud risk?
Why the Ability-to-Repay Rules are Like a Steering Wheel Lock
“Since the ability-to-repay rules were issued, there has been a precipitous and significant decline in income-specific mortgage loan application misrepresentation, defect and fraud risk. In fact, our income-specific metric within the Loan Application Defect Index (LADI) reached its peak in December 2012, one month before the rules were issued,” said Fleming. “By September 2013, nine months later, the income-specific defect risk metric declined 33 percent, as lenders implemented new loan manufacturing and underwriting practices in preparation for the effective start of rule in January 2014. Since then, income-specific defect and fraud risk has continued to decline and is currently 70 percent below its peak prior to publication of the ability-to-repay rules.
“The ability-to-repay standards require mortgage lenders to make a reasonable and good faith determination of the consumer’s ability to repay their mortgage. The rules have reduced the incentive to fraudulently misrepresent one’s income, a benefit to lenders,” said Fleming. “The ability-to-repay standards are essentially the mortgage fraud risk prevention equivalent of using a steering wheel lock to dissuade potential car thieves.
“Additionally, in order to make the good faith determination, the mortgage industry enhanced the manufacturing and underwriting practices specific to the assessment of a consumer’s income and ability to repay their mortgage. This has helped to reduce income-related loan application defects,” said Fleming. “The intent of the ability-to-repay standards was to help consumers secure mortgages that they can reasonably expect to repay. The ancillary benefit has been fewer loan application defects, and a steering wheel lock on mortgage fraud risk.”
April 2018 State Highlights
The five states with the greatest year-over-year increase in defect frequency are: Arkansas (+16.7 percent), Wyoming (+13.5 percent), New Mexico (+13.0 percent), Virginia (+12.2 percent), and Maryland (+10.8 percent).
The five states with the greatest year-over-year decrease in defect frequency are: South Carolina (-13.3 percent), Louisiana (-12.9 percent), Minnesota (-10.6 percent), Alabama (-10.0 percent), and Vermont (-9.6 percent).
April 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: Virginia Beach, Va. (+24.7 percent), Los Angeles (+18.5 percent), San Diego (+17.9 percent), Orlando, Fla. (+14.6 percent), and Oklahoma City (+11.3 percent).
Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are: Austin, Texas (-14.0 percent), Birmingham, Ala. (-13.8 percent), Raleigh, N.C. (-12.4 percent), Minneapolis (-11.9 percent), and New Orleans (-11.0 percent).
The next release of the First American Loan Application Defect Index will take place the week of June 25, 2018.
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. © 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; and banking, trust and wealth management 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.