Defect Risk Declines for Second Straight Month, According to First American’s Loan Application Defect Index
June 28 2019 - 7:00AM
Business Wire
—As potential home buyers feel the relief of
the 2018 sellers’ market conditions, we expect fraud risk to
continue to decline, 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 May 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.
May 2019 Loan Application Defect Index
- The frequency of defects, fraudulence and misrepresentation in
the information submitted in mortgage loan applications decreased
by 5.5 percent compared with the previous month.
- Compared to May 2018, the Defect Index increased by 7.5
percent.
- The Defect Index is down 15.7 percent from the high point of
risk in October 2013.
- The Defect Index for refinance transactions decreased by 7.2
percent compared with previous month, and is up 8.5 percent
compared with a year ago.
- The Defect Index for purchase transactions decreased by 6.3
percent compared with the previous month, and is up 8.4 percent
compared with a year ago.
Chief Economist Analysis: Market Dynamics Shift Toward Buyers
and Less Fraud Risk
“Last month, we predicted that if mortgage rates continued to
fall, it may help ease the pressure on fraud risk. Indeed, the
30-year, fixed-rate mortgage fell to its lowest level since January
2018, and fraud risk has fallen alongside it,” said Mark Fleming,
chief economist at First American. “The Loan Application Defect
Index for purchase transactions declined 6.3 percent in May
compared with April, the second consecutive month that defect risk
in purchase transactions declined. Overall, the frequency of
defects, fraudulence and misrepresentation in the information
submitted in mortgage loan applications also declined 5.5 percent
compared with last month.”
Market Dynamics Shift Toward Buyers and Less Fraud
Risk
“Following the strong sellers’ market conditions throughout
2018, market dynamics have shifted slightly toward buyers in 2019.
Mortgage rates began to decline in January 2019 and are now lower
than one year ago,” said Fleming. “Meanwhile, household income, the
other component of house-buying power, has continued to increase,
rising 2.8 percent in May compared with one year ago. Falling
mortgage rates and rising household income have boosted consumer
house-buying power.
“On the supply side, while inventory remains tight, there has
been some progress. In May, inventories increased 2.7 percent
nationally compared with one year ago,” said Fleming. “The trend is
similar at the market level as active inventory increased in 40 of
the top 50 metropolitan areas.
“House-buying power gains and improvements in inventory tilt the
market toward the buyer,” said Fleming. “But, what is the
connection to fraud risk? Potential home buyers feel less pressure
to misrepresent information on a loan application when strong
sellers’ market conditions wane.”
Fraud Risk is Local Too
“The real estate adage, 'location, location, location' applies
to the world of mortgage fraud risk as well. Some markets are
hotter than others, prompting differences in fraud risk,” said
Fleming. “The Defect Index 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.
“Nationally, the Defect Index declined 9.5 percent in May
compared with three months ago and defect risk declined in all but
one market – Columbus, Ohio. Indeed, in some markets, the decline
was substantial, exceeding 10 percent in 20 markets,” said Fleming.
“According to our April 2019 Real House Price Index (RHPI),
affordability improved in most of the markets where fraud risk
declined compared with three months ago, allowing potential home
buyers to feel more secure in their purchase and reducing fraud
risk.
May 2019 State Highlights
- The five states with a year-over-year increase in defect frequency are: Nebraska (+39.1
percent), Hawaii (+30.1 percent), Iowa (+29.9 percent), New York
(+27.6 percent), and Pennsylvania (+23.4 percent).
- The five states with a year-over-year decrease in defect frequency are: Arkansas (-9.7
percent), Vermont (-4.8 percent), Florida (-3.3 percent), Utah
(-2.3 percent), and Arizona (-1.3 percent).
May 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: Pittsburgh
(+31.7 percent), Buffalo, N.Y. (+30.2 percent), New Orleans (+24.7
percent), Cincinnati (+20.5 percent), and New York (+19.0
percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the
five markets with year-over-year decrease in defect frequency are: Jacksonville,
Fla. (-13.0 percent), Houston (-12.0 percent), San Diego (-9.0
percent), Orlando, Fla. (-8.6 percent), and Los Angeles (-4.2
percent).
Next Release
The next release of the First American Loan Application Defect
Index will take place the week of July 29, 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 Ginnaty Corporate Communications First American Financial
Corporation (714) 250-3298
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