Defect Risk in California Wildfire Areas Contributes to Rising National Risk, According to First American’s Loan Application Defect Index

The question is not if defect risk will continue to increase, but when will it stop, says Chief Economist Mark Fleming


December 26, 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 November 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.

 

November 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 2.5 percent compared with the previous month.

  • Compared to November 2017, the Defect Index decreased by 2.4 percent.

  • The Defect Index is down 20.5 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions increased by 2.8 percent compared with previous month, and is up 5.8 percent compared with a year ago.

  • The Defect Index for purchase transactions increased by 2.4 percent compared with the previous month, and is down 7.7 percent compared with a year ago.

   

Chief Economist Analysis: Defect Risk Rises Nationally, Partially Influenced by Rising Defect Risk in California Wildfire Areas

“In November, the Loan Application Defect Index for purchase transactions continued its string of month-over-month increases, rising for the third month in a row. Yet, year over year, the Defect Index for purchase transactions remains 7.7 percent below its level in November 2017,” said Mark Fleming, chief economist at First American. “The Defect Index for refinance transactions also increased 2.8 percent compared to the previous month and is 5.8 percent higher than a year ago. The overall Defect Index, which includes both purchase and refinance transactions, increased 2.5 percent compared with October, but declined 2.4 percent year over year.” 

Fraud and Defect Risk Follows Historic Trends in Wildfire-Impacted Areas

“The staggering scope of the damage and loss of life from California’s early November wildfires continues to grow. The Camp Fire in Butte County, the deadliest U.S. wildfire in a century, impacted 16,735 properties worth $3.8 billion dollars, according to data from DataTree by First American,” said Fleming. “This number is even higher when you consider other insured losses, in addition to the value of the home. The Woolsey Fire, which spanned Los Angeles and Ventura counties, was slightly smaller in size, but also had a devastating impact and ultimately destroyed over 1,600 structures.

“Historical data indicates that natural disasters and loan application defect risk go hand-in-hand, as they increase the potential for misrepresentation of collateral condition,” said Fleming. “Last month, we discussed the potential implications of the recent California wildfires on mortgage fraud risk, and after examining the first month of data, it appears historical trends are playing out.

“Following the Woolsey and Camp fires, defect and fraud risk has increased in all three of the affected metropolitan areas,” said Fleming. “Fraud and defect risk increased the most in Oxnard, rising 6.0 percent compared to October, followed by Los Angeles (3.3 percent) and San Francisco (2.8 percent). Before the November increase, fraud and defect risk was relatively flat in all three metropolitan areas.

“The tragic impacts of the Woolsey and Camp fires continue to be assessed and, unfortunately, appear to include rising fraud and defect risk,” said Fleming. “Given historical trends, the question is not if defect risk will continue to increase, but when will it stop.” 

November 2018 State Highlights

  • The five states with a year-over-year increase in defect frequency are: Alaska (+19.5 percent), Hawaii (+15.4 percent), West Virginia (+13.3 percent), Maine (+12.5 percent), and New York (+11.7 percent).

  • The five states with the greatest year-over-year decrease in defect frequency are: Vermont (-24.0 percent), Minnesota (-15.5 percent), Florida (-14.1 percent), Arizona (-14.1 percent), and Arkansas (-12.4 percent). 

    November 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 (+20.3 percent), Richmond, Va. (+17.4 percent), Los Angeles (+14.8 percent), Buffalo, N.Y. (+13.4 percent), and Pittsburgh (+12.1 percent).

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are: Houston (-20.2 percent), Minneapolis (-18.5 percent), Jacksonville, Fla. (-17.5 percent), Tampa, Fla. (-15.8 percent), and Birmingham, Ala. (-14.6 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of January 28, 2019. 

    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

###

myFirstAm®

Access the powerful online services available only at First American.

Sign In
Forgot Username or Password?

Sign Up

Sign up for a myFirstAm® account.

Other Platforms

  • FASTWeb

    Title ordering, routing and tracking.

  • AgentNet®

    eJackets, closing protection letters, back title, bulletins and more.

  • DataTree.com

    Access the nation's largest land record database.

  • Home Warranty

    Coverage for a home's major systems and appliances.