October 2017 Loan Application Defect Index

Defect Risk Rising in Natural Disaster-Impacted Markets

"Four of the top five markets with the greatest increases in defect risk are in Florida and Texas," says Chief Economist Mark Fleming.

The First American Loan Application Defect Index showed that in October 2017:

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same as compared with the previous month.
  • Compared with October 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 decreased 1.4 percent month-over-month, and is 19.0 percent higher than a year ago.
  • The Defect Index for purchase transactions remained unchanged compared with the previous month, and is up 12.5 percent from a year ago.

Mark Explains the Loan Application Defect Index

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States with the highest year-over-year increase in defect frequency:

  1. South Dakota (+50.8%)
  2. North Dakota (+47.1%)
  3. New Mexico (+38.5%)
  4. Iowa (+38.3%)
  5. Idaho (+36.0%)

There is one state with a year-over-year decrease in defect frequency:

  1. Connecticut (-4.3%)

Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with a year-over-year increase in defect frequency:

  1. Virginia Beach, VA (+47.5%)
  2. Raleigh, NC (+34.8%)
  3. Orlando, FL (+28.6%)
  4. Kansas City, MO (+27.4%)
  5. Louisville, KY (+27.1%)

Among the largest 50 Core Based Statistical Areas (CBSAs), one market had a year-over-year decrease in defect frequency:

  1. Hartford, CT (-1.6%)

"The surge in defect, fraud and misrepresentation risk that started a year ago has finally lost momentum," said Mark Fleming, chief economist at First American. "The Loan Application Defect Index has either remained unchanged or declined in every month since July, and is the same level as in the summer of 2015. Nationally, defect, fraud and misrepresentation risk has stabilized, but the local impact of recent natural disasters remains a concern."

Post-Natural Disaster Defect Risk Trends Appear to be Playing Out in Florida and Texas

"Unfortunately, historical data indicates that natural disasters and loan application defect risk go hand-in-hand," said Fleming. "Our defect, misrepresentation and fraud risk index identified signs of this risk trend in Texas and Florida this month and particularly in Houston, where risk increased the most among all the major markets we track."

  • Based on data from previous natural disasters, we recently highlighted the potential for increased mortgage loan application fraud risk in the hurricane-impacted states of Florida and Texas, particularly fraudulent or unintentional misrepresentation of collateral condition.
  • This month, four of the five markets with the greatest increases in defect risk compared with September are in Florida and Texas.
    1. Lakeland, Fla. (+11.9 percent)
    2. Virginia Beach, Va. (+8.4 percent)
    3. Cape Coral, Fla. (+5.9 percent)
    4. Orlando, Fla. (+5.9 percent)
    5. Houston (+5.6 percent)
  • In fact, looking at the national map, there is a clear concentration of defect risk across the southern part of the country.
States and Top 100 Markets

Methodology

The First American Loan Application Defect Index estimates the level of defects detected in the information submitted in mortgage loan applications processed by the First American FraudGuard® system. The index is based on the frequency with which defect indicators are identified. The Defect Index moves higher as greater numbers of defect indicators are identified. An increase in the index indicates a rising level of loan application defects. The index, nationally and in all markets, is benchmarked to a value of 100 in January 2011. Therefore, all index values can be interpreted as the percentage change in defect frequency relative to the defect frequency identified nationally in January 2011.

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 revenues 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, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.

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.