Defect Risk Following Historical Trend in Hurricane-Impacted States, According to First American’s Loan Application Defect Index

While we have not yet seen the full impact of the hurricane season on defect risk trends, we already see preliminary defect risk spikes in states impacted by Hurricane Florence, says Chief Economist Mark Fleming


October 26, 2018, 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 2018, 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 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 1.3 percent compared with the previous month.

  • Compared to September 2017, the Defect Index decreased by 6.0 percent.

  • The Defect Index is down 23.5 percent from the high point of risk in October 2013.

  • The Defect Index for refinance transactions increased by 1.4 percent compared with the previous month, and is the same as a year ago.

  • The Defect Index for purchase transactions increased by 1.3 percent compared with the previous month, and is down 11.1 percent compared with a year ago.   

Chief Economist Analysis: Hurricane Florence Prompts Rising Tide of Defect Risk in North and South Carolina

Beyond the devastating effect of hurricanes on the lives of those in their path and the damage on their homes, natural disasters also impact loan application defect risk.  Hurricanes, especially the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition and identity fraud in mortgage applications.

According to trend data in the Defect Index, we’re seeing this potential for mortgage fraud risk become a reality. Since the beginning of the year, the Defect Index has steadily decreased nationally, falling 8.4 percent from January through July 2018. However, the last two months have seen a reversal in this trend, with overall defect risk increasing 2.6 percent from August 1 through September 30. In fact, September is the first month this year to experience an increase in the Defect Index for purchase transactions. While we have not yet seen the full impact of the hurricane season on defect risk trends, we already see preliminary defect risk spikes in states impacted by Hurricane Florence, North and South Carolina.

Recent estimates show that Hurricane Florence’s flooding and wind destruction damaged approximately 50,000 residential units, with nearly 80 percent of these homes located in North Carolina. Worst-case projections estimate a total of $28.5 billion in flooding losses, plus an additional $1.5 billion in wind damage. North and South Carolina experienced nearly identical monthly increases in the Defect Index in September, 5.3 percent and 5.2 percent respectively. The rise in defect risk is more pronounced when comparing with three months ago, as North and South Carolina experienced 6.6 percent and 9.7 percent respective increases in defect risk. 

Based on Hurricane Irma Trend Data, Defect Risk Likely to Rise in Florida

Unfortunately, Hurricane Florence did not mark the end of hurricane season. Using data from DataTree by First American and the National Hurricane Center, we estimate that Hurricane Michael, the strongest hurricane on record to hit Florida, will impact $125 billion of residential real estate in the state.

Defect Index trend data from 2017 provides a glimpse at what we might expect in the months ahead. Before Hurricane Irma hit Florida in 2017, defect risk was decreasing. However, following the storm, the trend reversed course in September 2017, rising 10 percent through December. Since December 2017, defect risk has declined in Florida. Unfortunately, historical trends indicate that we should expect defect risk to increase in Florida over the next few months.

The good news is that defect risk spikes due to natural disasters tend to stabilize given time. In the case of Hurricane Irma, defect risk in Florida took approximately three months to stabilize, while defect risk in the New York metropolitan area took almost a full year before defect, fraud and misrepresentation risk returned to pre-Hurricane Sandy levels. 

September 2018 State Highlights

  • The five states with a year-over-year increase in defect frequency are: Hawaii (+9.7 percent), Maine (+8.6 percent), Alaska (+6.3 percent), Wyoming (+4.3 percent), and California (+3.9 percent)

  • The five states with the greatest year-over-year decrease in defect frequency are: Vermont (-19.4 percent), Minnesota (-18.6 percent), Arkansas (-17.0 percent), Alabama (-16.7 percent), and North Dakota (-15.7 percent). 

    September 2018 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: San Diego (+11.7 percent), Los Angeles (+11.1 percent), Virginia Beach, Va. (+9.6 percent), Richmond, Va. (+7.2 percent), and Orlando, Fla. (+5.9 percent).

  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are: Minneapolis (-21.4 percent), Birmingham, Ala. (-21.2 percent), Raleigh, N.C. (-18.8 percent), St. Louis (-16.9 percent), and Salt Lake City (-14.9 percent). 

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of November 23, 2018. 

    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. © 2018 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 $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at www.firstam.com

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