Defect Risk Declines for the First Time in Eight Months, According to First American’s Loan Application Defect Index
May 31 2019 - 7:00AM
Business Wire
—The future of fraud and misrepresentation
risk is tied closely to mortgage rates, 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 April 2019, 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.
April 2019 Loan Application Defect Index
- The frequency of defects, fraudulence
and misrepresentation in the information submitted in mortgage loan
applications decreased by 4.2 percent compared with the previous
month.
- Compared to April 2018, the Defect
Index increased by 11.0 percent.
- The Defect Index is down 10.8 percent
from the high point of risk in October 2013.
- The Defect Index for refinance
transactions decreased by 3.5 percent compared with previous month,
and is up 16.9 percent compared with a year ago.
- The Defect Index for purchase
transactions decreased by 4.0 percent compared with the previous
month, and is up 10.3 percent compared with a year ago.
Chief Economist Analysis: Lower Mortgage Rates Help Break
Defect Risk Trend
“The frequency of defects, fraudulence and misrepresentation in
the information submitted in mortgage loan applications declined
4.2 percent compared to last month. Notably, this marks the first
month-over-month decline since July 2018, thanks to lower mortgage
rates,” said Mark Fleming, chief economist at First American.
“Decreasing mortgage rates contributed to an increase in inventory,
reducing the competitive pressure on the housing market, as well as
contributing to an increase in lower-risk refinance transactions.
In line with this trend, the Loan Application Defect Index for
purchase transactions declined for the first time in eight months,
falling 4.0 percent in April compared with the previous month.
“The two competing trends that resulted in a flat fraud risk
last month were the increasing share of less risky refinance
transactions working to decrease overall fraud risk, and the
continuation of the hot sellers’ market, motivating buyers to
misrepresent information in order to qualify for a bigger mortgage
and increase overall fraud risk,” said Fleming.
“The mix of refinance and purchase activity fluctuated within
the month of April. Refinance activity increased in the first half
of the month as mortgage rates declined. However, lower mortgage
rates also fueled an increase in purchase transactions, as buyers
took advantage of their increased house-buying power,” said
Fleming. “In fact, purchase applications hit their highest level in
nine years towards the end of April. While loan application defects
can happen on both purchase or refinance transactions, there is a
higher propensity for fraud and misrepresentation with purchase
transactions.
Increased Inventory Cools Misrepresentation Pressure
“However, the decline in mortgage rates had a third and even
more important consequence, which was to help alleviate some of the
supply constraints that made the housing market so competitive,”
said Fleming. “As we saw in last month’s report, in extremely
competitive markets, there is more motivation to misrepresent
information on a loan application to qualify for the bigger
mortgage in order to win the bidding war.
“Most recently, real estate agents indicate that their buyers
are encouraged by an unexpected surge of supply. April did see an
increase in total housing inventory, rising to 1.83 million from
1.67 million in March, which is a 1.7% increase year-over-year.
Potential buyers feel less inclined to misrepresent information on
a loan application when they don’t feel the pressure of a hot
sellers’ market. Indeed, misrepresentation of income and employment
both fell this month, by 1.7 percent and 3.6 percent respectively,”
said Fleming.
“The future of fraud and misrepresentation risk is tied closely
to mortgage rates. Increased inventory reduces competitive
pressures and misrepresentation risk, alongside the rising share of
lower-risk refinance transactions,” said Fleming. “It remains to be
seen if mortgage rates, now flirting with 4 percent, will go any
lower. If so, we may anticipate the continued downward trend in
defect risk and misrepresentation, with further increases in
refinance transactions and inventory, resulting in less pressure on
the market.”
April 2019 State Highlights
- The five states with a year-over-year
increase in defect frequency are: New York (+37.3 percent),
Nebraska (+37.0 percent), Iowa (+35.0 percent), Hawaii (+33.7
percent), and West Virginia (+31.1 percent).
- There are two states with the
year-over-year decrease in defect frequency: Arkansas (-4.8
percent) and Florida (-1.1 percent).
April 2019 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: Buffalo, N.Y.
(+36.9 percent), Pittsburgh (+31.3 percent), Richmond, Va. (+30.1
percent), Cincinnati (+29.3 percent), and New York (+26.3
percent).
- Among the largest 50 Core Based
Statistical Areas (CBSAs), the five markets with year-over-year
decrease in defect frequency are: Jacksonville, Fla. (-11.6
percent), Houston (-8.5 percent), Orlando, Fla. (-7.4 percent), San
Diego (-4.3 percent), and Miami (-2.0 percent).
Next Release
The next release of the First American Loan Application Defect
Index will take place the week of June 24, 2019.
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. © 2019 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 $5.7 billion in 2018, the company offers its products
and services directly and through its agents throughout the United
States and abroad. In 2019, First American was named to
the Fortune 100 Best Companies to Work For® list for
the fourth consecutive year. More information about the company can
be found at www.firstam.com.
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Marcus GinnatyCorporate CommunicationsFirst American Financial
Corporation(714) 250-3298
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