Market Overview

Elevated Risk for Identity- and Collateral-Based Fraud, According to First American Loan Application Defect Index

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—Hurricanes, and particularly the flooding associated with these
natural disasters, create the potential and opportunity for significant
misrepresentation of collateral condition, 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 August 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.

August 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications remained the same
    in August 2017 as compared with the previous month.
  • Compared to August 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 decreased 1.4 percent
    month-over-month, and is 18.6 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: Data Breaches Increase Identity-Based Fraud
Risk

"Last month, we reported that for the first time in 2017 the Loan
Application Defect Index didn't rise, but we advised caution in
interpreting the one-month trend," said Mark Fleming, chief economist at
First American. "In August, the overall risk of defects, fraud and
misrepresentation again didn't change. It's a positive sign that loan
application risk has remained stable for two consecutive months, but
given the recent high-profile data breaches that exposed the personal
credit information of many U.S. consumers, the risk of identity-based
fraud and misrepresentation is certainly elevated."

Natural Disasters Create Fraud Risk Opportunity

"The devastating impact of Hurricanes Harvey and Irma on large parts of
Texas and most of Florida continues to be assessed. Thankfully, recovery
efforts are well underway and the rebuilding of homes has started," said
Fleming. "Yet, it should come as no surprise that in the wake of major
natural disasters the risk of mortgage loan application fraud increases.

"Hurricanes, and particularly the flooding associated with these natural
disasters, create the potential and opportunity for significant
misrepresentation of collateral condition," said Fleming. "Evidence from
monitoring application defect, misrepresentation and fraud risk after
Sandy in the New York metropolitan area indicates that one should be on
the lookout for increased risk in the markets impacted Harvey and Irma."

Additional Quotes from Chief Economist Mark Fleming

  • "In the aftermath of Hurricane Sandy, which impacted the New York City
    area in late October 2012, mortgage fraud, misrepresentation and
    defect risk based on the Defect Index increased 16.5 percent over four
    months in the New York metropolitan area."
  • "Fraud and misrepresentation risk remained elevated for an entire year
    after the hurricane, before returning to a level consistent with the
    national index in late 2013."
  • "The greater Houston and Tampa Bay markets were both significantly
    impacted by the recent hurricanes and will be markets to watch closely
    in the coming months for fraud and misrepresentation risk, especially
    related to collateral condition."

August 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: South Dakota (+56.1 percent), Wyoming (+50.8
    percent), North Dakota (+50.7 percent), North Carolina (+39.4
    percent), and New Mexico (+39.1 percent).
  • There is no state with a year-over-year decrease
    in defect frequency.

August 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
    (+32.4 percent); Tampa, Fla. (+25.7 percent), Las Vegas (+24.6
    percent); and Oklahoma City (+24.3 percent).
  • There is one CBSA among the largest 50 CBSAs with a year-over-year decrease
    in defect frequency: Houston (-6.7 percent).

Next Release

The next release of the First American Loan Application Defect Index
will be posted the week of October 30, 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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