Loan Application Defect Risk High in High-Rise Condos, According to First American’s Loan Application Defect Index

High-rise condominiums in coastal Florida markets were home to the highest risk of loan application defects, fraud and misrepresentation in January, says Chief Economist Mark Fleming


February 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 January 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.

January 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same compared with the previous month.
  • Compared with January 2017, the Defect Index increased by 13.7 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions remained unchanged compared with the previous month, and is 16.9 percent higher than a year ago.
  • The Defect Index for purchase transactions increased by 1.1 percent compared with the previous month, and is up 10.8 percent compared with a year ago.

Chief Economist Analysis: High Risk in Florida High Rises

“The overall defect, fraud and misrepresentation risk index remained unchanged, however, the index for purchase transactions increased in January,” said Mark Fleming, chief economist at First American. “While misrepresentation and manufacturing defects can happen on either purchase or refinance transactions, there is a greater propensity for fraud with purchase transactions. The uptick in defect frequency in purchase transactions in January is an indication of heightened fraud risk.

“As the risk of fraudulent purchase transactions rises, understanding where risk lies is important,” said Fleming. “Florida is one of the largest markets in the country with concentrations of condominiums in the large coastal markets. The combination of size and rising defect, fraud, and misrepresentation risk in condominiums, makes Florida an important market to watch.” 

Additional Quotes from Chief Economist Mark Fleming:

  • “Florida is currently the third riskiest state according to the defect, fraud and misrepresentation risk index, and by far the largest state among the five most risky. The other states in the top five are Arkansas, Idaho, Wyoming and North Dakota.”
  • “While overall defect, fraud and misrepresentation risk in the U.S. has remained stable for five consecutive months, defect risk in Florida has been on the rise, increasing 6.5 percent since September 2017.”
  • “This may be partly driven by the popularity of high-rise condominiums in Florida’s large coastal metropolitan areas. Condominiums are the only property type for which defect, fraud and misrepresentation risk has increased in the last three months, up 1.1 percent nationally.” 

January 2018 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+39.7 percent), New Mexico (+29.9 percent), Wyoming (+24.4 percent), Oregon (+23.9 percent) and Ohio (+23.1 percent).
  • There are two states with a year-over-year decrease in defect frequency: Connecticut (-4.3 percent) and Louisiana (-3.4 percent).

    January 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: Oklahoma City (+29.6 percent), Virginia Beach, Va. (+26.9 percent), Miami (+25.3 percent), Orlando, Fla. (+24.7 percent), and Cleveland (+23.9 percent).
  • Among the largest 50 CBSAs, the three markets with a year-over-year decrease in defect frequency are: Hartford, Conn. (-3.1 percent), Minneapolis (-2.6 percent), and Raleigh, N.C. (-2.5 percent).

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of March 26, 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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