Market Overview

Defect, Fraud, and Misrepresentation Risk Accelerates as Market Composition Shifts to Riskier Purchase Transactions, According to First American Loan Application Defect Index

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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 2017, 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 by loan type. It's 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, as well as state and market comparisons of mortgage loan defect
levels.

January 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications increased 5.8
    percent in January 2017 as compared with the previous month.
  • Compared to January 2016, the Defect Index decreased by 3.9 percent.
  • The Defect Index is down 28.4 percent from the high point of risk in
    October 2013.
  • The Defect Index for refinance transactions increased 3.5 percent
    month-over-month, and is 9.2 percent lower than a year ago.
  • The Defect Index for purchase transactions increased 2.5 percent
    compared to last month, and is down 1.2 percent compared to a year ago.

Chief Economist Analysis: Loan Purpose Matters in Defect and
Misrepresentation Risk

"This month, the Loan Application Defect Index continued the upward
trend that started in December 2016. The overall index increase is
largely the result of waning refinance activity in the mortgage market,"
said Mark Fleming, chief economist at First American. "Defect,
misrepresentation and fraud risk is significantly lower on refinance
transactions, so the increased risk of misrepresentation and fraud is
due to the increasing share of higher risk purchase transactions within
the mortgage market."

"While technology adoption has reduced risk for both purchase and
refinance transactions, part of the overall decline in risk has been due
to the recent dominance of refinance activity relative to purchase
activity," said Fleming. "As the mortgage market composition continues
to shift toward purchase transactions in 2017, the risk of defect, fraud
and misrepresentation will also increase. In real estate, location
matters. In defect, misrepresentation and fraud risk, loan purpose
matters."

Additional Quotes from Chief Economist Mark Fleming

  • "The Mortgage Bankers Association reported
    at the end of January that the share of refinance applications fell
    below 50 percent for the first time since July 2015."
  • "The last time the Loan Application Defect Index experienced a
    significant increase was also in mid-2015 in response to the
    decreasing share of refinance transactions in the market at the time."
  • "The market composition of purchase and refinance activity matters
    because our analysis consistently finds refinance transactions to be
    less risky. Currently, refinance transactions have 30 percent less
    loan application defect, misrepresentation and fraud risk than
    purchase transactions."
  • "The loan purpose risk gap, which measures the difference in risk
    between refinance and purchase loan transactions, has been increasing
    since October 2014 when the difference was only 4 percent."

January 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: Wyoming (+32.2 percent), North Dakota (+29.0
    percent), Montana (+27.3 percent), Mississippi (+25.4 percent), and
    Louisiana (+20.3 percent).
  • The five states with the greatest year-over-year decrease
    in defect frequency are: Michigan (-14.3 percent), Connecticut (-11.5
    percent), California (-10.8 percent), Rhode Island (-10.1 percent),
    and South Carolina (-10.0 percent).

January 2017 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: Raleigh, N.C. (+20.9 percent), St. Louis
    (+14.5 percent), Birmingham, Ala. (+7.4 percent), Minneapolis (+5.5
    percent), and Jacksonville, Fla. (+4.7 percent).
  • Among the largest 50 CBSAs, the five markets with the greatest
    year-over-year decrease in defect
    frequency are: Louisville/Jefferson, Ky. (-20.7 percent); Detroit
    (-20.0 percent); Oklahoma City (-17.4 percent); Sacramento, Calif.
    (-15.8 percent); and Miami (-15.3 percent).

Next Release

The next release of the First American Loan Application Defect Index
will be posted the week of March 27, 2017.

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. © 2017 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; and banking, trust
and investment advisory services. With revenues of $5.6 billion in 2016,
the company offers its products and services directly and through its
agents throughout the United States and abroad. In 2016, First American
was recognized by Fortune® magazine as one of the 100 best
companies to work for in America. More information about the company can
be found at www.firstam.com.

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