Mortgage Fraud Risk Reaches Multi-Year Low Point, According to First American’s Loan Application Defect Index

The strong economy combined with declining mortgage rates in 2019 resulted in falling income- and employment-specific defect risk, says Chief Economist Mark Fleming


October 31, 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 September 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. 

September 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 with September 2018, the Defect Index decreased by 11.5 percent.

  • The Defect Index is down 32.4 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions decreased by 4.5 percent compared with the previous month and is down 10.0 percent compared with a year ago.

  • The Defect Index for purchase transactions decreased by 2.6 percent compared with the previous month and is down 6.3 percent compared with a year ago.   

Chief Economist Analysis: Defect Index Reaches Lowest Point Since December 2016

“Declining for the sixth consecutive month, the Loan Application Defect Index for purchase transactions fell 2.6 percent in September compared with August. The Defect Index for refinance transactions also fell, declining 4.5 percent compared with the previous month,” said Mark Fleming, chief economist at First American. “The overall Defect Index, which includes both purchase and refinance transactions, fell 5.5 percent compared with last month, and is 11.5 percent lower than one year ago.

“The overall Defect Index has not been this low since December 2016. In fact, the Defect Index for purchase transactions reached an impressive milestone – the lowest point since we began tracking defect risk for purchase transactions in January 2011,” said Fleming. “It’s no coincidence that the broader U.S. economy has also hit some impressive milestones. The current economic expansion extended the longest economic expansion in history by another month in September. And, unemployment fell to 3.5 percent in September, which marked the 19th consecutive month at, or below, 4 percent unemployment. The unemployment rate is the lowest it has been since 1969 – over 50 years ago.

“The strong economy has driven the tight labor market and the competition among employers for workers has fueled wage growth. Wage growth pushes household income upward, which was 2.4 percent higher in September compared with one year ago,” said Fleming. “But, what is the connection between a strong economy and fraud risk?” 

Economy Up, Fraud Down?

“While the rising share of refinance transactions and weakening sellers’ market conditions have helped reduce fraud risk in 2019, there are some other factors at play as well. Rising household income driven by the strong labor market and lower mortgage rates have increased consumer house-buying power and helped boost consumer confidence,” said Fleming. “As consumer house-buying power and consumer confidence swell amid the strong labor market, the pressure to misrepresent income and employment in mortgage applications declines.

“The data in our employment- and income-specific defect indices reflect this dynamic. Employment fraud risk has steadily declined since March 2019 and employment-specific fraud risk was 9.2 percent lower in September than August, and 7.8 percent less than a year ago,” said Fleming. “Additionally, income-specific fraud risk in September was 12.5 percent lower compared with one year ago.

“So far, both the economy and fraud risk have reached positive milestones in 2019,” said Fleming. “The pattern seems clear – as long as the economy trends up, fraud risk trends down.” 

September 2019 State Highlights

  • The five states with a year-over-year increase in defect frequency are: South Dakota (+11.1 percent), Nebraska (+9.3 percent), New York (+6.3 percent), Iowa (+5.1 percent), and Wisconsin (+1.3 percent).

  • The five states with the greatest year-over-year decrease in defect frequency are: Alaska (-21.4 percent), Florida (-19.1 percent), Texas (-18.8 percent), Virginia (-18.3 percent), and New Hampshire (-16.7 percent). 

    September 2019 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the only three markets with a year-over-year increase in defect frequency are: Hartford, Conn. (+3.1 percent), Buffalo, N.Y. (+1.4 percent), and Kansas City, Mo. (+1.3 percent).

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year decrease in defect frequency are: San Diego (-24.4 percent), Orlando, Fla. (-23.3 percent), Houston (-23.3 percent), Virginia Beach, Va. (-22.0 percent), and San Antonio (-20.5 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of November 25, 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

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