Market Overview

Rising Rates May Increase Defect Risk, According to First American's Loan Application Defect Index

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—We have seen this before, in 2013, as mortgage rates rise, so
does overall 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 December 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.

December 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 December 2016, the Defect Index increased by 20.3 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 to the previous month, and is 21.1 percent higher than a year
    ago.
  • The Defect Index for purchase transactions remained unchanged compared
    to the previous month, and is up 12.3 percent compared with a year ago.

Chief Economist Analysis: How Do Rising Mortgage Rates Influence
Defect, Fraud and Misrepresentation Risk?

"Last month, I noted that defect, fraud and misrepresentation risk had
finally stabilized after a significant, seven-month-long rise," said
Mark Fleming, chief economist at First American. "Much of the elevated
risk can be attributed to an increase in the share of purchase mortgage
transactions, which tend to carry more risk. It's possible that all
economists agree, a rarity, that mortgage rates will increase in 2018,
which should increase the market share of purchase mortgage
transactions, putting upward pressure on the overall risk of defect,
fraud and misrepresentation.

"As the benefit of refinancing a mortgage declines for many consumers,
the share of refinance loan transactions will likely decrease and the
share of purchase transactions will increase. We have seen this before,
in 2013, as mortgage rates rise, so does overall defect, fraud and
misrepresentation risk," said Fleming.

Additional Quotes from Chief Economist Mark Fleming:

  • "The Defect Index illustrates the distinct difference in risk between
    refinance and purchase loan transactions, a distinction that has been
    consistent over time. Refinance loan transactions have always been
    less risky than purchase transactions, and this difference is more
    pronounced today than six years ago."
  • "Currently, refinance loan transactions are 24 percent less risky than
    purchase transactions."
  • "The Mortgage Bankers Association forecasts that the 30-year,
    fixed-rate mortgage rate will rise to 4.8 percent
    by the end of
    2018."
  • "Rising mortgage rates will reduce the consumer benefit of refinancing
    their existing loans, so the share of all mortgage transactions that
    are refinance transactions is expected to decline to 27 percent in
    2018."
  • "We can look to the recent past for a glimpse at how defect risk will
    change as mortgage rates increase. Between January and September 2013
    mortgage rates increased by 1.1 percent. Over that same time period,
    the overall level of risk in the Defect Index increased by 7.5
    percent."

December 2017 State Highlights

  • The five states with the greatest year-over-year increase
    in defect frequency are: South Dakota (+46.7 percent), New Mexico
    (+38.1 percent), Idaho (+31.6 percent), North Dakota (+31.1 percent)
    and Nebraska (+29.3 percent).
  • There is one state with a year-over-year decrease
    in defect frequency: Connecticut (-1.5 percent).

December 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. (+39.7 percent), Orlando,
    Fla. (+32.9 percent), Oklahoma City (+31.9 percent), Miami (+31.3
    percent), and Las Vegas (+30.2 percent).
  • There is one CBSA among the largest 50 CBSAs with a year-over-year decrease
    in defect frequency: Hartford, Conn. (-1.6 percent).

Next Release

The next release of the First American Loan Application Defect Index
will take place the week of February 26, 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. © 2018 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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