Mortgage Fraud Risk Reaches Turning Point, According to First American’s Loan Application Defect Index
November 27 2019 - 7:00AM
Business Wire
— As sellers’ market conditions ease their
grip on the broader housing market, defect risk on purchase
transactions remains likely to fall, 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 October 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.
October 2019 Loan Application Defect Index
- The frequency of defects, fraudulence and misrepresentation in
the information submitted in mortgage loan applications decreased
by 1.4 percent compared with the previous month.
- Compared to October 2018, the Defect Index decreased by 13.9
percent.
- The Defect Index is down 33.3 percent from the high point of
risk in October 2013.
- The Defect Index for refinance transactions decreased by 3.2
percent compared with the previous month, and decreased by 14.1
percent compared with a year ago.
- The Defect Index for purchase transactions remained the same as
the previous month, and is down 8.5 percent compared with a year
ago.
Chief Economist Analysis: Overall Defect and Fraud Risk
Continues Slide
“Based on our analysis, if mortgage rates continue to fall, the
pressure on fraud risk may weaken. This has played out throughout
most of 2019, as the 30-year, fixed mortgage rate has been falling
since December 2018, and overall fraud risk alongside it,” said
Mark Fleming, chief economist at First American. “Fraud risk began
declining in March 2019 and reached a historical low in October.
The Loan Application Defect Index for refinance transactions has
followed a similar trend, declining 14.1 percent between March and
October 2019.
“However, defect risk for purchase transactions broke its
six-month streak of declines in October. While still 8.5 percent
lower than one year ago, defect risk remained flat compared with
the previous month,” said Fleming. “October was also the first
month since November 2018 where the 30-year, fixed mortgage rate
increased month over month. Examining any potential link between
defect risk trends and mortgage rates may shed light on what to
expect for defect risk in the near future.”
The Relationship Between House-Buying Power and Fraud
Risk
“House-buying power is how much home one can buy based on
changes in household income and interest rates,” said Fleming.
“When household income rises, consumer house-buying power
increases. Decreasing mortgage rates also boost house-buying
power.
“Since December 2018, house-buying power has been increasing due
to steadily rising household income and declining mortgage rates.
In fact, house-buying power reached $421,120 in September 2019, the
highest point in our analysis dating back to 1990,” said Fleming.
“Yet, in October, when mortgage rates increased month over month
for the first time since November 2018, house-buying power declined
as well, falling 0.8 percent compared with the previous month. How
might the mortgage rate-driven decline in house-buying power have
played a role in ending the six-month decline in defect risk for
purchase transactions?
“Potential home buyers may feel more confident and less inclined
to commit fraud when they are in a better financial position to
purchase a home,” said Fleming. “In a supply-constrained market, a
decline in house-buying power makes it more difficult for potential
home buyers to compete with each other, so they may feel more
pressure to misrepresent information on a loan application.
“It’s important to remember that one month does not make a
trend. House-buying power may decline further, but should remain
strong by any recent historic standard. Additionally, new home
construction is accelerating,” said Fleming. “More new homes may
weaken the squeeze on supply and reduce competition among buyers
and the pressure to misrepresent information on a loan application.
As sellers’ market conditions loosen their grip on the broader
housing market, defect risk on purchase transactions remains likely
to fall.”
October 2019 State Highlights
- The two states with a year-over-year increase in defect frequency are: South Dakota
(+4.8 percent) and New York (+2.4 percent).
- The five states with a year-over-year decrease in defect frequency are: Alaska (-34.4
percent), West Virginia (-22.5 percent), Virginia (-21.7 percent),
Delaware (-20.3 percent), and North Carolina (-20.2 percent).
October 2019 Local Market Highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), only
one market had a year-over-year increase in defect frequency: Hartford, Conn.
(+3.2 percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the
five markets with a year-over-year decrease in defect frequency are: Virginia Beach,
Va. (-25.8 percent), San Diego (-25.3 percent), San Antonio (-24.3
percent), Richmond, Va. (-23.7 percent), and Raleigh, N.C. (-23.2
percent).
Next Release
The next release of the First American Loan Application Defect
Index will take place the week of December 30, 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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