Market Overview

Seven-Month Loan Defect Risk Trend Takes a Break, According to First American Loan Application Defect Index

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—Rising rates may reduce overall mortgage affordability and incent
borrowers to consider adjustable-rate mortgages, but the product shift
isn't likely to impact defect, fraud and misrepresentation 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 July 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.

July 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications remained the same
    in July 2017 as compared with the previous month.
  • Compared to July 2016, the Defect Index increased by 20.0 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 1.4 percent
    month-over-month, and is 20.3 percent higher than a year ago.
  • The Defect Index for purchase transactions remained the same compared
    to last month, and is up 15.2 percent compared to a year ago.

Chief Economist Analysis

"Finally, after seven consecutive months of increasing defect, fraud,
and misrepresentation risk, no change compared to last month is welcome
news," said Mark Fleming, chief economist at First American. "In
particular, purchase transactions, which are inherently more at risk of
defects, fraud and misrepresentation, showed no increase compared to a
month ago. One month doesn't establish a trend, so it will be important
to see if we've reached a turning point in the long-run trend of
increasing defect risk."

Will The Fed's Actions in September Increase Loan Defect Risk?

"In September, the Federal Open Market Committee (FOMC) may act again to
push interest rates higher," said Fleming. "Historically, when mortgage
rates increase, more borrowers consider adjustable-rate mortgages with
lower rates instead of more traditional fixed-rate mortgages to maintain
purchasing power.

"An adjustable-rate mortgage can be a good alternative to a fixed-rate
mortgage in a rising rate environment, but they have historically had
more fraud and misrepresentation risk," said Fleming. "Yet, this year
the risk gap has closed. Rates may rise and adjustable-rate mortgages
may be more attractive, but the Fed's actions won't impact loan defect
risk."

Additional Quotes from Chief Economist Mark Fleming

  • "Analysis of defect, fraud and misrepresentation risk trends for
    adjustable- and fixed-rate mortgages shows that, prior to this year,
    adjustable-rate mortgages have been riskier, sometimes significantly."
  • "In 2017, while risk has been increasing for both loan types,
    fixed-rate mortgage risk has closed the gap. Currently, the defect
    risk for both adjustable- and fixed-rate mortgages is approximately
    the same."
  • "Rising rates may reduce overall mortgage affordability and incent
    borrowers to consider adjustable rate mortgages, but the product shift
    isn't likely to impact defect, fraud and misrepresentation risk."

June 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: South Dakota (+68.5 percent), North
    Dakota (+54.5 percent), Wyoming (+50.8 percent), North Carolina (+39.4
    percent), and Iowa (+33.9 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. (+54.0 percent); New Orleans
    (+34.7 percent); Charlotte, N.C. (+28.6 percent); Buffalo, N.Y. (+27.6
    percent); and Tampa, Fla. (+25.3 percent).
  • There is one CBSA among the largest 50 CBSAs with a year-over-year decrease
    in defect frequency: Houston (-1.1 percent).

Next Release

The next release of the First American Loan Application Defect Index
will be posted the week of September 25, 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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