Defect Risk Declines for Second Straight Month, According to First American’s Loan Application Defect Index

As potential home buyers feel the relief of the 2018 sellers’ market conditions, we expect fraud risk to continue to decline, says Chief Economist Mark Fleming

June 28, 2019, 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 May 2019, 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. 

May 2019 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 5.5 percent compared with the previous month.

  • Compared to May 2018, the Defect Index increased by 7.5 percent.

  • The Defect Index is down 15.7 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions decreased by 7.2 percent compared with previous month, and is up 8.5 percent compared with a year ago.

  • The Defect Index for purchase transactions decreased by 6.3 percent compared with the previous month, and is up 8.4 percent compared with a year ago.   

Chief Economist Analysis: Market Dynamics Shift Toward Buyers and Less Fraud Risk

“Last month, we predicted that if mortgage rates continued to fall, it may help ease the pressure on fraud risk. Indeed, the 30-year, fixed-rate mortgage fell to its lowest level since January 2018, and fraud risk has fallen alongside it,” said Mark Fleming, chief economist at First American. “The Loan Application Defect Index for purchase transactions declined 6.3 percent in May compared with April, the second consecutive month that defect risk in purchase transactions declined. Overall, the frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications also declined 5.5 percent compared with last month.” 

Market Dynamics Shift Toward Buyers and Less Fraud Risk

“Following the strong sellers’ market conditions throughout 2018, market dynamics have shifted slightly toward buyers in 2019. Mortgage rates began to decline in January 2019 and are now lower than one year ago,” said Fleming. “Meanwhile, household income, the other component of house-buying power, has continued to increase, rising 2.8 percent in May compared with one year ago. Falling mortgage rates and rising household income have boosted consumer house-buying power.

“On the supply side, while inventory remains tight, there has been some progress. In May, inventories increased 2.7 percent nationally compared with one year ago,” said Fleming. “The trend is similar at the market level as active inventory increased in 40 of the top 50 metropolitan areas.

“House-buying power gains and improvements in inventory tilt the market toward the buyer,” said Fleming. “But, what is the connection to fraud risk? Potential home buyers feel less pressure to misrepresent information on a loan application when strong sellers’ market conditions wane.” 

Fraud Risk is Local Too

“The real estate adage, “location, location, location” applies to the world of mortgage fraud risk as well. Some markets are hotter than others, prompting differences in fraud risk,” said Fleming. “The Defect Index measures loan application misrepresentation, defect and fraud risk over time in 50 of the largest markets in the U.S. When analyzing local market-level data, comparing data at three-month intervals tends to be more helpful in identifying trends than data from more volatile month-to-month comparisons.

“Nationally, the Defect Index declined 9.5 percent in May compared with three months ago and defect risk declined in all but one market – Columbus, Ohio. Indeed, in some markets, the decline was substantial, exceeding 10 percent in 20 markets,” said Fleming. “According to our April 2019 Real House Price Index (RHPI), affordability improved in most of the markets where fraud risk declined compared with three months ago, allowing potential home buyers to feel more secure in their purchase and reducing fraud risk. 

May 2019 State Highlights

  • The five states with a year-over-year increase in defect frequency are: Nebraska (+39.1 percent), Hawaii (+30.1 percent), Iowa (+29.9 percent), New York (+27.6 percent), and Pennsylvania (+23.4 percent).

  • The five states with a year-over-year decrease in defect frequency are: Arkansas (-9.7 percent), Vermont (-4.8 percent), Florida (-3.3 percent), Utah (-2.3 percent), and Arizona (-1.3 percent). 

May 2019 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: Pittsburgh (+31.7 percent), Buffalo, N.Y. (+30.2 percent), New Orleans (+24.7 percent), Cincinnati (+20.5 percent), and New York (+19.0 percent).

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with year-over-year decrease in defect frequency are: Jacksonville, Fla. (-13.0 percent), Houston (-12.0 percent), San Diego (-9.0 percent), Orlando, Fla. (-8.6 percent), and Los Angeles (-4.2 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of July 29, 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. © 2019 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 $5.7 billion in 2018, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2019, First American was named to the Fortune 100 Best Companies to Work For® list for the fourth consecutive year. More information about the company can be found at www.firstam.com.