Market Overview

Impact of FinTech Investment Felt in Nearly All Markets, According to First American's Loan Application Defect Index

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—The question is not where is defect risk declining, but when will
it stop, 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 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.

July 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the
    information submitted in mortgage loan applications decreased by 1.3
    percent compared with the previous month.
  • Compared to July 2017, the Defect Index decreased by 9.5 percent.
  • The Defect Index is down 25.4 percent from the high point of risk in
    October 2013.
  • The Defect Index for refinance transactions is the same as previous
    month, and is 2.8 percent lower than a year ago.
  • The Defect Index for purchase transactions decreased by 1.3 percent
    compared with the previous month, and is down 13.2 percent compared
    with a year ago.

Chief Economist Analysis: FinTech Investment Helping Reduce Defect
Risk

"The Loan
Application Defect Index
for purchase transactions continued its
downward trend, declining 1.3 percent in July compared with the month
before, the seventh consecutive month defect risk in purchase
transactions have fallen," said Mark Fleming, chief economist at First
American. "Yet, is declining loan application misrepresentation, defect
and fraud risk isolated to a few markets or is the trend more
geographically broad based?

"The Defect Index also measures loan application misrepresentation,
defect and fraud risk over time in 50 of the largest markets in the U.S.
When analyzing local market level data, comparing data at three-month
intervals tends to be more helpful in identifying trends than data from
more volatile month-to-month comparisons," said Fleming. "Nationally,
the Defect Index decline of 7.3 percent in July relative to three-month
moving average was driven by declining risk in all but two markets – New
Orleans and Louisville, Ky. In every other market, loan application,
misrepresentation, defect and fraud risk declined. In some markets the
decline was substantial. In 39 markets, defect risk declined more than 5
percent, while the three-month decline in risk exceeded 10 percent in 11
markets.

"The mortgage finance industry's significant investment in financial
technology to deliver a convenient, digital, highly automated and
all-around better home-buying experience has also enhanced the mortgage
manufacturing and underwriting process, producing declining levels of
defect risk," said Fleming. "The benefits of this investment are not
geographically specific, so it's no surprise that we see the impact of
this investment in the vast majority of markets. The question is not
where is defect risk declining, but when will it stop?"

July 2018 State Highlights

  • There are two states with a year-over-year increase
    in defect frequency: Maine (+1.4 percent) and Hawaii (+1.1 percent).
  • The five states with the greatest year-over-year decrease
    in defect frequency are: South Carolina (-24.7 percent), Minnesota
    (-20.7 percent), Alabama (-20.0 percent), Vermont (-19.8 percent), and
    North Dakota (-18.6 percent).

July 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. (+12.8 percent), Los
    Angeles (+10.8 percent), Orlando, Fla. (+9.6 percent), San Diego (+4.9
    percent), and Memphis, Tenn. (+2.6 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. (-27.3 percent), Raleigh,
    N.C. (-24.7 percent), Minneapolis (-23.3 percent), Boston (-19.5
    percent), and Austin, Texas (-19.0 percent).

Next Release

The next release of the First American Loan Application Defect Index
will take place the week of September 24, 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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