Market Overview

Where Defect Risk is 'Naughty' or 'Nice,' According to First American's Loan Application Defect Index

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—In the spirit of the holiday season, we've ranked the five states
with the greatest defect risk as ‘naughty' and the five states with the
least defect risk as ‘nice,' 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 November 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 loan type. It is 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, and can provide state- and market-specific comparisons of
mortgage loan defect levels.

November 2017 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications remained the same
    compared with the previous month.
  • Compared to November 2016, the Defect Index increased by 22.1 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in
    October 2013.
  • The Defect Index for refinance transactions remained unchanged
    compared with the previous month and is 23.2 percent higher than a
    year ago.
  • The Defect Index for purchase transactions increased 1.1 percent month
    over month and is up 13.8 percent compared with a year ago.

Chief Economist Analysis: Reason for Optimism in 2018

"As 2017 ends and we look forward to 2018, there is reason to be
optimistic about defect, fraud and misrepresentation risk. After a year
of significant change, defect risk has stabilized, with no change in the
overall level of defect risk in three of the last four months," said
Mark Fleming, chief economist at First American. "Keep in mind that the
Loan Application Defect Index was at its lowest point ever in November
2016, before defect risk surged by 24 percent in the following seven
months, one of the fastest changes the defect index has recorded since
its inception in 2011. The increase was primarily driven by an increase
in the share of purchase mortgage transactions, which tend to carry more
risk, and more transactions in riskier markets. This fall, we have seen
some moderation and stabilization of these market dynamics and, as a
result, no further increase.

"There is the well-known adage that real estate is local and, when it
comes to defect, fraud and misrepresentation risk, that adage may also
apply regionally," said Fleming. "Yet, there is another well-known adage
that correlation does not imply causation. A wise maxim to remember as
we monitor defect risk trends and look forward to 2018."

‘Naughty or Nice' – Defect Risk Varies Significantly By Region:
Additional Quotes from Chief Economist Mark Fleming

  • "In the spirit of the holiday season, we have created ‘naughty or
    nice' lists for defect, fraud and misrepresentation risk. The states
    on the ‘naughty' list had the greatest defect risk in November and the
    states on the ‘nice' list had the least defect risk in November."
  • "In November, the five states on our ‘naughty' list, those with the
    greatest level of defect risk, were Arkansas, Idaho, North Dakota,
    Florida and Montana."
  • "In November, the five states on our ‘nice' list, those with the
    lowest level of defect risk, were New Hampshire, Connecticut,
    Massachusetts, Pennsylvania and Maine."
  • "Interestingly, these states are all in the Northeast. In fact, New
    York is only slightly ‘less nice' (riskier) than the five states that
    made the ‘nice' list, and Vermont is the only ‘naughty' market in the
    region."
  • "As the Defect Index map shows, defect risk, or the lack thereof, is
    clearly concentrating regionally. The Northeast and California are
    generally low risk, while the South, Southeast and upper Midwest are
    generally higher risk."

November 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: South Dakota (+50.8 percent), North
    Dakota (+42.3 percent), New Mexico (+39.7 percent), Idaho (+36.0
    percent) and Iowa (+35.0 percent).
  • There is one state with a year-over-year decrease
    in defect frequency: Connecticut (-1.5 percent).

November 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: Virginia Beach, Va. (+49.2 percent), Orlando,
    Fla. (+35.2 percent), Miami (+34.2 percent), Louisville, Ky. (+31.0
    percent) and Kansas City, Mo. (+29.5 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 take place the week of January 29, 2018.

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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