Market Overview

Defect, Fraud and Misrepresentation Risk Surges Higher as Mortgage Rates Rise, 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 February 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.

February 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications increased 4.1
    percent in February 2017 as compared with the previous month.
  • Compared to February 2016, the Defect Index increased by 1.3 percent.
  • The Defect Index is down 25.5 percent from the high point of risk in
    October 2013.
  • The Defect Index for refinance transactions increased 3.4 percent
    month-over-month, and is 6.2 percent lower than a year ago.
  • The Defect Index for purchase transactions increased 2.4 percent
    compared to last month, and is up 2.4 percent compared to a year ago.

Chief Economist Analysis: Rising Rates Spurs Demand for Historically
Riskier Loan Products

"This month, the Loan Application Defect Index surged higher as rising
mortgage rates continue to put downward pressure on lower risk mortgage
refinance activity. The March rate increase by the Federal Open Market
Committee and strong economic performance will continue to pressure
rates upward," said Mark Fleming, chief economist at First American.

"Defect, fraud and misrepresentation risk continues to respond to the
shift in market composition. Rising mortgage rates continue to increase
the share of higher risk purchase loan applications, but they are also
incenting more borrowers to apply for ARMs. The savings for the consumer
can be significant, but ARM loan applications have historically had
higher defect, misrepresentation and fraud risk," said Fleming. "The
increasing popularity of adjustable rate mortgages is something to keep
an eye on as the spring home buying season warms up.

"As the spring home buying season gets underway in earnest, the volume
of higher risk purchase applications will grow and further increase loan
application defect and fraud risk. The increased share of higher risk
purchase transactions and the potential for more adjustable rate
mortgages amid the expected strong spring market means mortgage lenders
should remain watchful for defect and fraud risk," said Fleming.

Additional Quotes from Chief Economist Mark Fleming

  • "The average rate for a 30-year, fixed-rate mortgage was 4.15 percent
    in February, which continued to put downward pressure on the volume of
    lower risk mortgage refinances."
  • "As mortgage rates increase, some borrowers will seek affordability by
    switching from 30-year, fixed-rate mortgages to less expensive
    adjustable rate mortgages (ARMs)."
  • "The 5/1 ARM averaged 3.2 percent in February, almost a full
    percentage point less than the traditional fixed-rate mortgage."
  • "According to the Mortgage
    Bankers Association Application survey
    , the share of ARM
    applications reached its highest level in over a year at 7.5 percent
    of total applications."
  • "Over the last three months, loan application, defect and fraud risk
    has increased by 5.6 percent on ARM loan applications."
  • "While there is no significant difference in risk between ARMs and
    fixed-rate mortgages today, historically ARM loan applications have
    been the riskier loan product type."

February 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: Wyoming (+43.1 percent), North Dakota (+38.2
    percent), Mississippi (+31.8 percent), South Dakota (+31.5 percent),
    and Montana (+26.5 percent).
  • The five states with the greatest year-over-year decrease
    in defect frequency are: Michigan (-9.6 percent), Connecticut (-9.0
    percent), New York (-7.4 percent), Maryland (-5.4 percent), and
    California (-5.4 percent).

February 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 is: Raleigh, N.C. (+27.7 percent); Birmingham,
    Ala. (+11.4 percent); St. Louis (+11.3 percent); Minneapolis (+11.1
    percent); and Jacksonville, Fla. (+9.6 percent).
  • Among the largest 50 CBSAs, the five markets with the greatest
    year-over-year decrease in defect
    frequency are: Detroit (-16.9 percent); Louisville/Jefferson, Ky.
    (-14.8 percent); Milwaukee (-14.1 percent); Austin, Texas (-12.0
    percent); and Oklahoma City (-11.8 percent).

Next Release

The next release of the First American Loan Application Defect Index
will be posted the week of April 24, 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 both 2016 and 2017,
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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