Defect Risk Declines Nationally, According to First American’s Loan Application Defect Index
—However, there are regions with the potential for higher defect risk due to the impact from
natural disasters, says Chief Economist Mark Fleming—
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 October 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.
October 2018 Loan Application Defect Index
- The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage
loan applications increased by 1.3 percent compared with the previous month.
- Compared to October 2017, the Defect Index decreased by 4.8 percent.
- The Defect Index is down 22.5 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 up 2.9 percent compared with a year ago.
- The Defect Index for purchase transactions increased by 2.5 percent compared with the previous month
and is down 8.9 percent compared with a year ago.
Chief Economist Analysis: Rising Mortgage Fraud Risk Linked to Wildfires
“While the overall risk of loan application defects, fraud and misrepresentation declined from a year-over-year perspective,
there are regions with the potential for higher defect risk due to the impact from natural disasters – specifically, the
communities impacted by recent wildfires in California,” said Mark Fleming, chief economist at First American. “The Camp Fire
wildfire in Butte county, which has been named
the deadliest U.S. wildfire in a century, and the Woolsey Fire in Los Angeles and Ventura counties, are some of the worse
wildfires in the state’s history.
“In addition to the devastating impact on human life, the likely damage to housing is staggering. According to the California
Department of Forestry and Fire Protection, the
Camp Fire destroyed 13,972 residences and
Woolsey Fire destroyed 1,500 structures,” said Fleming. “While it’s too early to estimate the cost of the damage from these
fires, the Associated Press recently reported that
wildfires in Northern California last year ‘gutted 6,800 homes and resulted in $12.6 billion in insured losses.’ Since the
damage from the recent wildfires greatly exceeded the 2017 wildfire damages, we can expect a higher estimate in losses.
“Unfortunately, on top of the damage to thousands of homes, historical data indicates that natural disasters and loan
application defect risk go hand-in-hand,” said Fleming. “As we’ve seen too often, natural disasters create the potential and
opportunity for significant misrepresentation of collateral condition.
“In the aftermath of the December 2017 Thomas Fire in Ventura and Santa Barbara counties, mortgage defect, fraud and
misrepresentation risk, as measured by the Defect Index, increased 10 percent in one month in the Oxnard-Thousand Oaks-Ventura
metropolitan area,” said Fleming. “Fraud and misrepresentation risk remained elevated for five months after the wildfire, before
trending down again. Defect, fraud and misrepresentation risk in the Oxnard metropolitan area, which had been declining prior to
the Thomas Fire, has yet to return to pre-wildfire levels.”
Fraud Risk in California Likely to Increase in the Months Ahead
“While the devastating impacts from the wildfires in California continue to be assessed, the risk of mortgage loan application
fraud in the communities impacted is likely to increase in the coming months,” said Fleming. “The Defect Index in Los Angeles has
trended down in recent months, while Oxnard has experienced a relatively flat trend in fraud risk following the post-Thomas Fire
surge. Given historical trends, it’s fair to expect increases in defect and fraud risk in these affected markets in the near
future.”
October 2018 State Highlights
- The five states with a year-over-year increase in defect frequency are:
Alaska (+16.9 percent), Hawaii (+9.8 percent), California (+8.1 percent), Wyoming (+7.4 percent), and Maine (+6.9 percent).
- The five states with the greatest year-over-year decrease in defect
frequency are: Vermont (-22.9 percent), Minnesota (-19.8 percent), Arkansas (-15.2 percent), Alabama (-14.7 percent), and Arizona
(-14.3 percent).
October 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: San Diego (+16.0 percent), Los Angeles (+12.5
percent), Memphis, Tenn. (+10.5 percent), Buffalo, N.Y. (+10.4 percent), and Richmond, Va. (+10.1 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 (-22.9 percent), Birmingham, Ala.
(-17.3 percent), Columbus, Ohio (-15.1 percent), St. Louis (-14.6 percent), and Las Vegas (-14.5 percent).
Next Release
The next release of the First American Loan Application Defect Index will take place the week of December 24, 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; banking, trust and wealth management services; and other related products and 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.
Marcus Ginnaty
Corporate Communications
First American Financial Corporation
(714) 250-3298
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