July 2018 Loan Application Defect Index

Impact of FinTech Investment Felt in Nearly All Markets

"The question is not where is defect risk declining, but when will it stop," says Chief Economist Mark Fleming.

The First American Loan Application Defect Index showed that in July 2018:

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.3 percent compared with the previous month.
  • Compared to July 2017, the Defect Index decreased by 9.5 percent.
  • The Defect Index is down 25.4 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions is the same as previous month, and is 2.8 percent lower than a year ago.
  • The Defect Index for purchase transactions decreased by 1.3 percent compared with the previous month, and is down 13.2 percent compared with 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. Maine (+1.4%)
  2. Hawaii (+1.1%)

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

  1. South Carolina (-24.7%)
  2. Minnesota (-20.7%)
  3. Alabama (-20.0%)
  4. Vermont (-19.8%)
  5. North Dakota (-18.6%)

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

  1. Virginia Beach, VA (+12.8%)
  2. Los Angeles (+10.8%)
  3. Orlando, FL (+9.6%)
  4. San Diego (+4.9%)
  5. Memphis, TN (+2.6%)

Among the largest 50 Core Based Statistical Areas (CBSAs), there are three markets with the highest year-over-year decrease in defect frequency.

  1. Birmingham, AL (-27.3%)
  2. Raleigh, NC (-24.7%)
  3. Minneapolis (-23.3%)
  4. Boston (-19.5%)
  5. Austin, TX (-19.0%)

"The mortgage finance industry's significant investment in financial technology to deliver a convenient, digital, highly automated and all-around better home-buying experience has also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk," said Mark Fleming, chief economist at First American.

Impact of FinTech Investment Felt in Nearly All Markets

The Loan Application Defect Index for purchase transactions continued its downward trend, declining 1.3 percent in July compared with the month before, the seventh consecutive month defect risk in purchase transactions have fallen. Yet, is declining loan application misrepresentation, defect and fraud risk isolated to a few markets or is the trend more geographically broad based?

The Defect Index also measures loan application misrepresentation, defect and fraud risk over time in 50 of the largest markets in the U.S. When analyzing local market level data, comparing data at three-month intervals tends to be more helpful in identifying trends than data from more volatile month-to-month comparisons. Nationally, the Defect Index decline of 7.3 percent in July relative to three-month moving average was driven by declining risk in all but two markets — New Orleans and Louisville, Ky. In every other market, loan application, misrepresentation, defect and fraud risk declined. In some markets the decline was substantial. In 39 markets, defect risk declined more than 5 percent, while the three-month decline in risk exceeded 10 percent in 11 markets.

Graph: Impact of FinTech Investment Felt in Practically All Markets

The mortgage finance industry's significant investment in financial technology to deliver a convenient, digital, highly automated and all-around better home-buying experience has also enhanced the mortgage manufacturing and underwriting process, producing declining levels of defect risk. The benefits of this investment are not geographically specific, so it's no surprise that we see the impact of this investment in the vast majority of markets. The question is not where is defect risk declining, but when will it stop?

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 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.

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.