Market Overview

Seventh Consecutive Month of Increased Defect, Fraud and Misrepresentation Risk Driven by Shortage of Homes for Sale

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—The market shift toward more purchase mortgages, coupled with
rising rates and tight inventory, is generating the consistent upward
trend in defect risk, says Chief Economist Mark Fleming—

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 June 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.

June 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications increased 1.2
    percent in June 2017 as compared with the previous month.
  • Compared to June 2016, the Defect Index increased by 16.7 percent.
  • The Defect Index is down 17.6 percent from the high point of risk in
    October 2013.
  • The Defect Index for refinance transactions increased 2.9 percent
    month-over-month, and is 16.7 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent
    compared to last month, and is up 13.8 percent compared to a year ago.

Chief Economist Analysis

"Following seven straight months of increases, the Loan Application
Defect Index is now at the same level as almost two years ago in July
2015," said Mark Fleming, chief economist at First American. "The market
shift toward more purchase mortgages, coupled with rising rates and
tight inventory, is generating the consistent upward trend in defect
risk. Purchase transactions are inherently more at risk of defects,
fraud and misrepresentation, and the pressures resulting from one of the
strongest sellers' markets in recent memory compounds the risk of an
error on a loan application."

Rising Risk in Already Risky Markets

"We often look at the level of risk or the magnitude of change in risk
over a particular time, but less often the combination of the two," said
Fleming. "For example, the five markets with the greatest increase in
defect frequency are Raleigh, N.C.; Charlotte, N.C.; New Orleans; Tampa,
Fla.; and San Jose, Calif. According to Defect Index data, the markets
with the highest levels of risk are currently Birmingham, Ala.; New
Orleans; Raleigh, N.C.; Miami; and Tampa, Fla.

"By cross-referencing these two lists, high risk levels and fastest
rising risk, we can identify the five riskiest markets with the fastest
increasing risk," said Fleming.

          Rank       Market       Defect Index Value       Year-Over-Year Change
1       Raleigh, N.C.       97       49.2 percent
2       New Orleans       98       25.6 percent
3       Tampa, Fla.       95       23.4 percent
4       Birmingham, Ala.       99       20.1 percent
5       Charlotte, N.C.       90       26.8 percent
                 

"Raleigh, N.C., is currently the riskiest market in the country, with a
high level that is growing quickly. In fact, all of the markets in this
list are in the South," said Fleming. "Combining the levels of risk and
rate of change rankings of loan application defect, fraud and
misrepresentation risk reveals that major markets in North Carolina and
Florida are high risk and the risk in these markets continues to grow at
a strong pace."

June 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: South Dakota (+66.7 percent), North Dakota
    (+52.2 percent), Wyoming (+46.3 percent), West Virginia (+37.9
    percent) and North Carolina (+35.3 percent).
  • There is no state with a year-over-year decrease
    in defect frequency.

June 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. (+49.2 percent); Charlotte,
    N.C. (+26.8 percent); New Orleans (+25.6 percent); Tampa, Fla. (+23.4
    percent); and San Jose, Calif. (+23.3 percent).
  • There is no CBSA among the largest 50 CBSAs with a year-over-year decrease
    in defect frequency.

Next Release

The next release of the First American Loan Application Defect Index
will be posted the week of August 28, 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 total revenue 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 and again in
2017, First American was named to the Fortune 100 Best Companies
to Work For® list. More information about the company can be
found at www.firstam.com.

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