Pace of Mortgage Fraud Risk Decline Cools in December, According to First American’s Loan Application Defect Index

Should market composition shift back toward a greater share of higher risk purchase transactions, or the sellers’ market strengthens even further, we can expect an even slower pace of decline, or even a return to rising fraud risk, says Chief Economist Mark Fleming


January 30, 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 December 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. 

December 2019 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.5 percent compared with the previous month.

  • Compared to November 2018, the Defect Index decreased by 16.0 percent.

  • The Defect Index is down 34.3 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions decreased by 3.3 percent compared with previous month, and decreased by 26.6 percent compared with a year ago.

  • The Defect Index for purchase transactions increased by 1.3 percent compared with the previous month, and is down 13.3 percent compared with a year ago.   

Chief Economist Analysis: Overall Defect Risk Declines 1.5 percent in December

“For the majority of 2019, overall fraud risk steadily declined, largely due to the rising volume of lower risk refinance transactions driven by low mortgage rates. After falling since March, overall defect risk stabilized in November, and then declined again in December. The overall Defect Index, which includes both purchase and refinance transactions, fell 1.5 percent compared with November, and is 23 percent lower than one year ago,” said Mark Fleming, chief economist at First American. “While overall fraud risk declined in December, the pace of decline was slower than earlier in the year. The Defect Index for purchase transactions increased 1.3 percent compared with November, while the Defect Index for refinance transactions fell 3.3 percent, its ninth straight month of declining risk.” 

Why Did the Pace of Falling Fraud Risk Slow Down?

“Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, so the rise and fall of the share of higher risk purchase activity can significantly impact the overall Defect Index. The refinance share of the market was 30 percent in the first quarter of 2019, and is anticipated to have increased to 51 percent in the fourth quarter of 2019, as purchase transaction volume declines significantly during the holidays,” said Fleming. “Despite a slight increase in mortgage rates in December, applications to refinance a home increased 146 percent compared with the same month one year ago. The increase in the share of lower risk refinance transactions relative to purchase transactions contributed to the decline in overall fraud risk.

“However, since fraud risk began to decline in March 2019, the average monthly rate of decline has remained fairly constant at approximately 4 percent. In December, fraud risk declined by a modest 1.5 percent. The reason? While low mortgage rates and a healthy labor market continue to boost house-buying power and home-buying demand, inventory remains near quarter-century lows,” said Fleming. “In December, nearly half of all existing homes that came on the market were gone within the month. The current three months’ supply is much lower than the six months’ supply that is considered a balanced market. This strong sellers’ market may pressure some home buyers to misrepresent information on a loan application in order to be more competitive when bidding for a home. Couple a supply-constrained market with increased refinance share, and the pace of fraud risk decline slows down.

“The declining fraud risk trend was consistent across the country in December. Overall fraud risk did not increase in a single state or metropolitan area relative to one year ago, but fraud risk did rise in several markets on a month-over-month basis,” said Fleming. “While declining fraud risk is the new norm, should market composition shift back toward a greater share of higher risk purchase transactions, or the sellers’ market strengthens even further, we can expect an even slower pace of decline, or even a return to rising fraud risk.” 

December 2019 State Highlights

  • There is no state 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 (-42.7 percent), Alaska (-35.1 percent), North Carolina (-31.9 percent), Virginia (-31.5 percent), and Indiana (-35.1 percent). 

December 2019 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: Virginia Beach, Va. (-35.6 percent), Richmond, Va. (-35.3 percent), San Diego (-31.6 percent), Raleigh, N.C. (-31.1 percent), and Birmingham, Ala. (-29.9 percent). 

    Next Release

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