Market Overview

Shift to Accommodate Millennial Home Buying Preferences Reduces Loan Application Defect Risk, According to First American's Loan Application Defect Index

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—The investment in technology to better serve millennial
first-time homebuyers also helped make the manufacture and underwriting
of mortgage loans less risky, 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 2018, 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.

June 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications decreased by 3.8
    percent compared with the previous month.
  • Compared to June 2017, the Defect Index decreased by 8.3 percent.
  • The Defect Index is down 24.5 percent from the high point of risk in
    October 2013.
  • The Defect Index for refinance transactions is down 2.8 percent
    compared with the previous month, and is 1.4 percent lower than a year
    ago.
  • The Defect Index for purchase transactions decreased by 3.6 percent
    compared with the previous month, and is down 12.1 percent compared
    with a year ago.

Chief Economist Analysis: How Millennial Home Buying Expectations
Unintentionally Reduced Loan App Defect Risk

"As the mortgage market has continued its transition away from
refinances to a predominantly purchase-oriented loan market, the Defect
Index for purchase transactions has continued to decline, dropping 3.6
percent in the last month and 12.1 percent in the last year," said Mark
Fleming, chief economist at First American. "This officially marks a
six-month long decline in defect, fraud and misrepresentation and risk
on purchase transactions, which have traditionally been considered
higher risk.

"Not only is the national trend positive, but loan application defect,
fraud and misrepresentation risk is declining in practically every
market in the nation," said Fleming. "Only five major metropolitan
markets experienced an increase in overall defect, fraud and
misrepresentation risk compared with a year ago. Many markets
experienced significant declines of 10 percent or more.

"Is millennial demand for homeownership behind this trend? In addition
to their desire
to be homeowners
, millennials also expect a convenient, digital,
highly automated and all-around better home-buying experience. The
mortgage finance industry has invested heavily in technology to meet
this demand to compete for millennials' mortgage loan business," said
Fleming. "The technology investment that has occurred in the mortgage
industry in recent years to better serve millennial first-time home
buyers also helped make the manufacture and underwriting of mortgage
loans less risky with fewer defects and misrepresentation on loan
applications. Sometimes, unintended consequences aren't so bad."

June 2018 State Highlights

  • The three states with a year-over-year increase
    in defect frequency: California (+1.3 percent), Virginia (+1.3
    percent) and New Mexico (+1.2 percent).
  • The five states with the greatest year-over-year decrease
    in defect frequency are: South Carolina (-25.0 percent), Vermont
    (-21.8 percent), Minnesota (-19.5 percent), Alabama (-19.1 percent)
    and North Carolina (-17.4 percent).

June 2018 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. (+15.6 percent), Los
    Angeles (+12.0 percent), Orlando, Fla. (+8.4 percent), San Diego (+7.5
    percent), and Memphis, Tenn. (+3.9 percent).
  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five
    markets with the largest year-over-year decrease
    in defect frequency are: Birmingham, Ala. (-26.3 percent), Raleigh,
    N.C. (-23.7 percent), Minneapolis (-20.9 percent), Austin, Texas
    (-20.9 percent), and Pittsburgh (-20.5 percent).

Next Release

The next release of the First American Loan Application Defect Index
will take place the week of August 27, 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; banking, trust and
wealth management services; and other related products and services.
With total revenue of $5.8 billion in 2017, the company offers its
products and services directly and through its agents throughout the
United States and abroad. In 2018, First American was named to the Fortune 100
Best Companies to Work For® list for the third consecutive
year. More information about the company can be found at www.firstam.com.

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