—Stronger buyers’ market conditions and a
rising share of refinance transactions – that’s what we need to
maintain declining fraud risk momentum in 2019, 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 August 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.
August 2019 Loan Application Defect Index
- The frequency of defects, fraudulence and misrepresentation in
the information submitted in mortgage loan applications decreased
by 3.9 percent compared with the previous month.
- Compared to August 2018, the Defect Index decreased by 5.2
percent.
- The Defect Index is down 28.3 percent from the high point of
risk in October 2013.
- The Defect Index for refinance transactions decreased by 4.3
percent compared with the previous month, and decreased by 4.3
percent compared with a year ago.
- The Defect Index for purchase transactions decreased by 3.8
percent compared with the previous month, and is down 2.5 percent
compared with a year ago.
Chief Economist Analysis: Fraud Risk for Purchase
Transactions Slides for Fifth Month
“Declining for the fifth consecutive month, the Loan Application
Defect Index for purchase transactions continued its downward
trend, falling 3.8 percent in August compared with July. The Defect
Index for refinance transactions also fell, declining 4.3 percent
compared with the previous month,” said Mark Fleming, chief
economist at First American. “The overall Defect Index, which
includes both purchase and refinance transactions, fell 3.9 percent
compared with last month, and is 5.2 percent lower than one year
ago.
“The overall Defect Index has not been this low since January
2017. However, falling defect risk is a recent phenomenon,” said
Fleming. “In late 2018 and early 2019, overall defect risk rose at
a fast pace and continued to do so until reaching a peak in
February 2019. So, what sparked the slide in fraud risk in
2019?”
Why is 2019 Different?
“Between July 2018 and February 2019, the overall Defect Index
increased 25 percent. And then, it stopped. In the second half of
2018, rising mortgage rates reduced the share of refinance
transactions, leading to a greater share of higher-risk purchase
transactions. Additionally, hurricanes and wildfires in the second
half of 2018 contributed to climbing defect risk,” said Fleming.
“Our research indicates natural disasters go hand-in-hand with
rising loan application defect risk, as natural disasters create
greater opportunity for misrepresentation of collateral condition.
But, 2019 provided a fresh start. In addition to fewer natural
disasters, there are two primary reasons why 2019 has been the year
of declining fraud risk.”
1.) Market Dynamics Shift Toward Buyers
“Following the strong sellers’ market conditions throughout
2018, market dynamics shifted slightly toward buyers in 2019.
Mortgage rates began to decline in January 2019 and are 0.8
percentage points lower in August than January,” said Fleming.
“Meanwhile, household income, the other component of house-buying
power, has continued to increase, rising 1.5 percent in August
compared with January 2019. 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 compared with 2018.
“House-buying power gains and improvements in inventory tilt the
market toward the buyer. 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, as the market is less competitive,” said
Fleming.
2.) Increase in the Share of Refinances
“For many homeowners, the most important consideration when
deciding to refinance is whether the mortgage rate is sufficiently
lower than their existing rate. The 30-year, fixed-rate mortgage in
August averaged 3.6 percent, the lowest since October 2016,” said
Fleming. “According to estimates, 11.6
million existing households would be refinancing candidates at a
mortgage rate of 3.5 percent, compared with just 2.9 million
households when the mortgage rate is 4.5 percent.
“As a result of lower rates, refinance applications are up 148
percent compared with one year ago, according to the latest MBA
mortgage applications survey,” said Fleming. “Defect, fraud and
misrepresentation risk is significantly lower on refinance
transactions, so the reduced risk of fraud and misrepresentation in
2019, and August in particular, is largely due to the increasing
share of lower risk refinance transactions within the mortgage
market.”
Will Buyers’ or Sellers’ Market Conditions Change Fraud Risk
Outlook?
“Housing market conditions and fewer natural disasters have
created a declining fraud risk environment in 2019, so far.
However, lower mortgage rates and higher incomes typically result
in more demand for homes,” said Fleming. “While inventory has made
some gains, it has mostly been for higher priced homes. The supply
for lower- and middle-priced homes remains tight.
“Increasing demand against limited supply means that the housing
market could be poised for another strong sellers’ market, which
could create a spike in fraud risk. The good news is that mortgage
rates fell further in September, indicating even more refinances
may be on the way,” said Fleming. “Stronger buyers’ market
conditions and a rising share of refinance transactions – that’s
what we need to maintain declining fraud risk momentum in
2019.”
August 2019 State Highlights
- The five states with a year-over-year increase in defect frequency are: Nebraska (+23.2
percent), Iowa (+17.6 percent), South Dakota (+13.9 percent), New
York (+12.8 percent), and North Dakota (+8.4 percent).
- The five states with a year-over-year decrease in defect frequency are: Florida (-16.7
percent), Delaware (-13.8 percent), Texas (-13.8 percent), Vermont
(- percent), and Maryland (-11.7 percent).
August 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.
(+8.6 percent), Kansas City, Mo. (+6.8 percent), New York (+5.2
percent), Hartford, Conn. (+3.1 percent), and San Jose, Calif.
(+2.9 percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the
five markets with the greatest year-over-year decrease in defect frequency are: Houston (-22.7
percent), San Diego (-21.2 percent), Orlando, Fla. (-20.9 percent),
Jacksonville, Fla. (-20.2 percent), and Tampa, Fla. (-18.4
percent).
Next Release
The next release of the First American Loan Application Defect
Index will take place the week of October 28, 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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Media Contact: Marcus Ginnaty Corporate Communications
First American Financial Corporation (714) 250-3298
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