Where Defect Risk is ‘Naughty’ or ‘Nice,’ According to First American’s Loan Application Defect Index

In the spirit of the holiday season, we’ve ranked the five states with the greatest defect risk as ‘naughty’ and the five states with the least defect risk as ‘nice,’ says Chief Economist Mark Fleming


December 28, 2017, 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 November 2017, 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.

November 2017 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 to November 2016, the Defect Index increased by 22.1 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 23.2 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent month over month and is up 13.8 percent compared with a year ago.

Chief Economist Analysis: Reason for Optimism in 2018

“As 2017 ends and we look forward to 2018, there is reason to be optimistic about defect, fraud and misrepresentation risk. After a year of significant change, defect risk has stabilized, with no change in the overall level of defect risk in three of the last four months,” said Mark Fleming, chief economist at First American. “Keep in mind that the Loan Application Defect Index was at its lowest point ever in November 2016, before defect risk surged by 24 percent in the following seven months, one of the fastest changes the defect index has recorded since its inception in 2011. The increase was primarily driven by an increase in the share of purchase mortgage transactions, which tend to carry more risk, and more transactions in riskier markets. This fall, we have seen some moderation and stabilization of these market dynamics and, as a result, no further increase.

“There is the well-known adage that real estate is local and, when it comes to defect, fraud and misrepresentation risk, that adage may also apply regionally,” said Fleming. “Yet, there is another well-known adage that correlation does not imply causation. A wise maxim to remember as we monitor defect risk trends and look forward to 2018.”

‘Naughty or Nice’ – Defect Risk Varies Significantly By Region: Additional Quotes from Chief Economist Mark Fleming

  • “In the spirit of the holiday season, we have created ‘naughty or nice’ lists for defect, fraud and misrepresentation risk. The states on the ‘naughty’ list had the greatest defect risk in November and the states on the ‘nice’ list had the least defect risk in November.”
  • “In November, the five states on our ‘naughty’ list, those with the greatest level of defect risk, were Arkansas, Idaho, North Dakota, Florida and Montana.”
  •  “In November, the five states on our ‘nice’ list, those with the lowest level of defect risk, were New Hampshire, Connecticut, Massachusetts, Pennsylvania and Maine.”
  • “Interestingly, these states are all in the Northeast. In fact, New York is only slightly ‘less nice’ (riskier) than the five states that made the ‘nice’ list, and Vermont is the only ‘naughty’ market in the region.”
  •  “As the Defect Index map shows, defect risk, or the lack thereof, is clearly concentrating regionally. The Northeast and California are generally low risk, while the South, Southeast and upper Midwest are generally higher risk.”

November 2017 State Highlights

  • The five states with the greatest year-over-year increase in defect frequency are: South Dakota (+50.8 percent), North Dakota (+42.3 percent), New Mexico (+39.7 percent), Idaho (+36.0 percent) and Iowa (+35.0 percent).
  • There is one state with a year-over-year decrease in defect frequency: Connecticut (-1.5 percent).

    November 2017 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. (+49.2 percent), Orlando, Fla. (+35.2 percent), Miami (+34.2 percent), Louisville, Ky. (+31.0 percent) and Kansas City, Mo. (+29.5 percent).
  • There is no CBSA among the largest 50 CBSAs with a year-over-year decrease in defect frequency.

    Next Release

    The next release of the First American Loan Application Defect Index will take place the week of January 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. © 2017 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 investment advisory services. With total revenue of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

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