Mortgage Fraud Risk Falls to New Low, According to First American’s Loan Application Defect Index

When refinance transactions boom, fraud risk falls, says Chief Economist Mark Fleming


February 28, 2020, 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 January 2020, 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. 

January 2020 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 3.0 percent compared with the previous month.

  • Compared to January 2019, the Defect Index decreased by 28.6 percent.

  • The Defect Index is down 36.3 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions decreased by 5.2 percent compared with the previous month, and decreased by 33.7 percent compared with a year ago.

  • The Defect Index for purchase transactions remained the same compared with the previous month, and is down 17.9 percent compared with a year ago.   

Chief Economist Analysis: Defect Index Falls to Lowest Point Since 2011

“Overall defect risk, as measured by our Loan Application Defect Index, has largely trended down since early 2019 with a few exceptions. In January 2020, this long-run trend continued as overall defect risk reached its lowest level since we began tracking it in 2011,” said Mark Fleming, chief economist at First American. “While the Defect Index for purchase transactions remained the same after two months of increasing risk, the Defect Index for refinance transactions fell 5.2 percent compared with the previous month, pulling the overall defect risk levels to this new low point. We can thank the increasing share of less risky refinance transactions for the low levels of defect and fraud risk.” 

Boom Goes the Fraud Risk

“For the majority of 2019, overall fraud risk steadily declined, primarily due to the rising volume of lower risk refinance transactions driven by declining mortgage rates. As mortgage rates fall, the incentive to refinance increases. For many homeowners, the most important consideration of whether to refinance or not is if the mortgage rate is sufficiently lower than their existing rate,” said Fleming. “In January, with the 30-year, fixed-rate mortgage at its lowest level since November 2016, refinance applications were 146 percent higher than the same week one year ago. Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the reduced risk of misrepresentation and fraud is due to the growing share of lower risk refinance transactions within the mortgage market.

“This trend has surfaced in previous refinance booms and mini-booms. In 2012, overall fraud risk declined 4.7 percent, as the mortgage rate declined from 3.9 percent to 3.6 percent between the first quarter of 2012 and fourth quarter of 2012 and the share of refinances increased from 68 percent to 72 percent,” said Fleming. “Similarly, fraud risk reached a low point in November 2016 amid the refinance boom between the fourth quarter of 2015 and third quarter of 2016, which pushed the share of refinance originations from 46 percent to 51 percent.

“More recently, between July and August 2019, overall fraud risk fell 4.0 percent month-over-month, as the mortgage rate declined from 3.8 percent to 3.6 percent, triggering a 196-percent jump in refinance volume compared with the same week one year ago,” said Fleming. “When refinance transactions boom, fraud risk falls.

“In February, the 30-year, fixed-rate mortgage fell to its lowest level since October 2016. Refinance mortgage applications in February have already spiked in response, with the industry citing a mini ‘refinance boom,’” said Fleming. “If the mortgage market composition continues to shift toward refinance transactions in 2020, the risk of defect, fraud and misrepresentation will continue to decline.” 

January 2020 State Highlights

  • There are no states with a year-over-year increase in defect frequency.

  • The five states with the greatest year-over-year decrease in defect frequency are: West Virginia (-47.5 percent), Indiana (-38.3 percent), North Carolina (-37.4 percent), Virginia (-37.1 percent), and Montana (-36.4). 

January 2020 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), there is no market with a year-over-year increase in defect frequency.

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year decrease in defect frequency are: Richmond, Va. (-40.7 percent), Virginia Beach, Va. (-39.4 percent), Indianapolis (-36.7 percent), Raleigh, N.C. (-36.5 percent), and Detroit (-35.8 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of March 30, 2020. 

    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. © 2020 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 $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2020, First American was named to the Fortune 100 Best Companies to Work For® list for the fifth consecutive year. More information about the company can be found at www.firstam.com.

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