Loan Application Defect and Fraud Risk Drops As Home Purchases Take Higher Share Of Mortgage Market

— It’s likely that all of the investment in more digitized, automated, and efficient mortgage manufacturing and underwriting technology that’s been made in recent years is beginning to pay off, says Chief Economist Mark Fleming —


June 28, 2018, Santa Ana, Calif.

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 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.

May 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 2.4 percent compared with the previous month.
  • Compared with May 2017, the Defect Index decreased by 3.6 percent.
  • The Defect Index is down 21.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions remained the same compared with the previous month, and is 4.4 percent higher than a year ago.
  • The Defect Index for purchase transactions decreased by 4.6 percent compared with the previous month, and is down 7.8 percent compared with a year ago.

Chief Economist Analysis: Despite the fact that market share for purchase transactions is increasing, we’re seeing a decrease in defect and fraud risk

“By now, everyone in the mortgage industry is aware that we are entering a market that will be dominated by purchase demand for the next several years,” said Mark Fleming, chief economist at First American. “According to the latest Mortgage Bankers Association forecast, refinance transactions will make up 28 percent of total mortgages originated in 2018 and is forecasted to drop to 23 percent by 2020. This is, of course, due to the current environment of increasing mortgage rates that follows years of persistently low rates. Until last month, the average rate for a 30-year fixed mortgage had remained below 4.5 percent for 80 consecutive months. And since most homeowners have benefited from the low-rate environment, they now have little financial incentive to refinance, or sell and buy again,” said Fleming. “With mortgage rates continuing to rise, the financial value of keeping their current low-rate mortgages is likely to increase.

“The silver lining? Despite the aforementioned obstacles, consumers will continue to buy.  Richard Thaler, Nobel Prize-winning economist, is famous for the analogy that we are more like Homer Simpson than Spock when making economic decisions. Lifestyle decisions will still incentivize people to buy, and sometimes that beautiful kitchen is just too hard to resist! Again, according to the Mortgage Bankers Association forecast, the purchase market is expected to grow even as mortgage rates rise, largely on the strength of first-time homebuyer demand.

“With this fact in mind, the most important news in this month’s Loan Application Defect Index (LADI) is that the Defect Index for purchase transactions decreased by 4.6 percent compared with the previous month, is down 7.8 percent compared with a year ago, and has declined almost 10 percent in just the past five months. There’s no better time to have loan application misrepresentation, defect and fraud risk on purchase transactions on the decline than when the market share of purchase transactions is rising.

“It’s likely that all of the investment in more digitized, automated, and efficient mortgage manufacturing and underwriting technology that’s been made in recent years is beginning to pay off,” said Fleming. “Now the question is, how much lower will it go?”

May 2018 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: Arkansas (+12.0 percent), Wyoming (+7.5 percent), New Mexico (+7.5 percent), California (+5.2 percent) and Virginia (+5.2 percent).
  • The five states with the greatest year-over-year decrease in defect frequency are: South Carolina (-20.4 percent), Alabama (-17.2 percent), Vermont (-15.3 percent), Minnesota (-14.9 percent) and Louisiana (-14.0 percent).

May 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. (+20.0 percent), Los Angeles (+15.9 percent), Orlando, Fla. (+13.4 percent), San Diego (+12.7 percent) and Memphis, Tenn. (+8.0 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. (-22.4 percent), Austin, Texas (-19.3 percent), Pittsburgh (-16.7 percent), Raleigh, N.C. (-16.3 percent) and Minneapolis (-16.3 percent).

Next Release

The next release of the First American Loan Application Defect Index will take place the week of July 29, 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; and banking, trust and wealth management 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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