Defect Risk Declines for First Time in Eight Months, According to First American’s Loan Application Defect Index

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 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. 

April 2019 Loan Application Defect Index

• The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 4.2 percent compared with the previous month.

• Compared to April 2018, the Defect Index increased by 11.0 percent.

• The Defect Index is down 10.8 percent from the high point of risk in October 2013.

• The Defect Index for refinance transactions decreased by 3.5 percent compared with previous month, and is up 16.9 percent compared with a year ago.

• The Defect Index for purchase transactions decreased by 4.0 percent compared with the previous month, and is up 10.3 percent compared with a year ago.   

Chief Economist Analysis: Lower Mortgage Rates Help Break Defect Risk Trend

“The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications declined 4.2 percent compared to last month. Notably, this marks the first month-over-month decline since July 2018, thanks to lower mortgage rates,” said Mark Fleming, chief economist at First American. “Decreasing mortgage rates contributed to an increase in inventory, reducing the competitive pressure on the housing market, as well as contributing to an increase in lower-risk refinance transactions. In line with this trend, the Loan Application Defect Index for purchase transactions declined for the first time in eight months, falling 4.0 percent in April compared with the previous month.

“The two competing trends that resulted in a flat fraud risk last month were the increasing share of less risky refinance transactions working to decrease overall fraud risk, and the continuation of the hot sellers’ market, motivating buyers to misrepresent information in order to qualify for a bigger mortgage and increase overall fraud risk,” said Fleming.

“The mix of refinance and purchase activity fluctuated within the month of April. Refinance activity increased in the first half of the month as mortgage rates declined. However, lower mortgage rates also fueled an increase in purchase transactions, as buyers took advantage of their increased house-buying power,” said Fleming. “In fact, purchase applications hit their highest level in nine years towards the end of April. While loan application defects can happen on both purchase or refinance transactions, there is a higher propensity for fraud and misrepresentation with purchase transactions. 

Increased Inventory Cools Misrepresentation Pressure

“However, the decline in mortgage rates had a third and even more important consequence, which was to help alleviate some of the supply constraints that made the housing market so competitive,” said Fleming. “As we saw in last month’s report, in extremely competitive markets, there is more motivation to misrepresent information on a loan application to qualify for the bigger mortgage in order to win the bidding war.

“Most recently, real estate agents indicate that their buyers are encouraged by an unexpected surge of supply. April did see an increase in total housing inventory, rising to 1.83 million from 1.67 million in March, which is a 1.7% increase year-over-year. Potential buyers feel less inclined to misrepresent information on a loan application when they don’t feel the pressure of a hot sellers’ market. Indeed, misrepresentation of income and employment both fell this month, by 1.7 percent and 3.6 percent respectively,” said Fleming.

“The future of fraud and misrepresentation risk is tied closely to mortgage rates.  Increased inventory reduces competitive pressures and misrepresentation risk, alongside the rising share of lower-risk refinance transactions,” said Fleming. “It remains to be seen if mortgage rates, now flirting with 4 percent, will go any lower. If so, we may anticipate the continued downward trend in defect risk and misrepresentation, with further increases in refinance transactions and inventory, resulting in less pressure on the market.” 

April 2019 State Highlights

• The five states with a year-over-year increase in defect frequency are: New York (+37.3 percent), Nebraska (+37.0 percent), Iowa (+35.0 percent), Hawaii (+33.7 percent), and West Virginia (+31.1 percent).

• There are two states with the year-over-year decrease in defect frequency: Arkansas     (-4.8 percent), and Florida (-1.1 percent). 

April 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: Buffalo, N.Y. (+36.9 percent), Pittsburgh (+31.3 percent), Richmond, Va. (+30.1 percent), Cincinnati (+29.3 percent), and New York (+26.3 percent).

• Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with year-over-year decrease in defect frequency are: Jacksonville, Fla. (-11.6 percent), Houston (-8.5 percent), Orlando, Fla. (-7.4 percent), San Diego (-4.3 percent), and Miami (-2.0 percent). 

Next Release

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