The Drivers of Loan Application Defect Risk at the Local Level, According to First American’s Loan Application Defect Index

The characteristics of the properties and loans involved in the real estate transactions in a given time period play an important role, says Chief Economist Mark Fleming


April 27, 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 March 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.

March 2018 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.2 percent compared with the previous month.
  • Compared with March 2017, the Defect Index increased by 3.8 percent.
  • The Defect Index is down 19.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased by 1.4 percent compared with the previous month, and is 11.1 percent higher than a year ago.
  • The Defect Index for purchase transactions decreased by 2.2 percent compared with the previous month, and is up 2.3 percent compared with a year ago.

Chief Economist Analysis: What Drives Loan Application Defect Risk at the Local Level?

“A common adage about real estate is that it’s local. The dynamics of one housing market can be very different from another depending on the local economy and access to natural amenities, like mountains or water. The levels of loan application defect, fraud and misrepresentation risk vary greatly based on local conditions as well,” said Mark Fleming, chief economist at First American. “In fact, substantial differences exist among the 100 markets that we track with the Loan Application Defect Index. For example, the riskiest market this month, Little Rock, Ark., is almost twice as risky as the safest market, Rochester, NY.

“Defect risk levels can change dramatically over time as well. In the last three months, six markets experienced an increase in defect, fraud and misrepresentation risk of more than 10 percent, while three other markets experienced a decrease of more than 10 percent. The point is, just as real estate is driven by local market conditions, so is defect risk,” said Fleming.

“But, what are some of the conditions that tend to influence defect risk levels the most? The characteristics of the properties and loans involved in the real estate transactions in a given time period play an important role. Transactions involving condominiums tend to carry higher defect risk than transactions involving single-family homes,” said Fleming. “Traditionally, defect risk has been greater in purchase transactions than refinance transactions. Transactions involving second homes or investment properties tend to carry elevated levels of defect risk as well.

“The Defect Index consistently identifies significant differences in risk in these areas. All else equal, a market with fewer refinance transactions, greater numbers of second home and investment property transactions and more multi-unit and condo property transactions will be riskier,” said Fleming. “Nonetheless, measuring loan application defect, fraud and misrepresentation risk at the local level summarizes local differences into a single measure that can be consistently compared across markets.

Defect Risk Dissipates in Rust Belt, Concentrates in Sun Belt

“In March, the overall frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.2 percent compared with the previous month and increased by almost 4 percent compared with a year ago,” said Fleming.

“Interestingly, there appears to be a high concentration of markets with elevated defect risk in the Sun Belt states and a high concentration of markets with lower defect risk in the Rust Belt states. For example, Little Rock, Ark., Miami and Knoxville, Tenn. are currently the three riskiest markets in the country, while Rochester, NY, Scranton, Penn. and Toledo, Ohio are the least risky,” said Fleming. “How this geographic trend in defect risk changes in the next few months bears watching as we consider what risk factors may be at play in each market.”

March 2018 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: Wyoming (+19.0 percent), Arkansas (+17.8 percent), Virginia (+15.5 percent), Maryland (+15.3 percent) and New Mexico (+14.7 percent).
  • The five states with the greatest year-over-year decrease in defect frequency are: Louisiana (-11.8 percent), Minnesota (-8.4 percent), Connecticut (-6.9 percent), South Carolina (-6.8 percent) and New York (-3.8 percent).

    March 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. (+22.2 percent), San Diego (+20.0 percent), Los Angeles (+17.7 percent), Portland, Ore. (+15.9 percent), and Orlando, Fla. (+14.6 percent).
  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are: Minneapolis (-12.0 percent), Austin, Texas (-9.4 percent), Raleigh, NC (-8.2 percent), Buffalo NY (-5.9 percent), and New Orleans (-4.5 percent).

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of May 28, 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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