August 2017 Loan Application Defect Index

WHAT IS ELEVATING IDENTITY- AND COLLATERAL-BASED FRAUD RISK?

"Hurricanes, and particularly the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same in August 2017 as compared with the previous month.
  • Compared to August 2016, the Defect Index increased by 20.0 percent.
  • The Defect Index is down 17.6 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 18.6 percent higher than a year ago.
  • The Defect Index for purchase transactions remained the same compared to last month, and is up 15.2 percent compared to 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 (+56.1%)
  2. Wyoming (+50.8%)
  3. North Dakota (+50.7%)
  4. North Carolina (+39.4%)
  5. New Mexico (+39.1%)

There is no state with a year-over-year decrease in defect frequency.

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

  1. Raleigh, NC (+54.0%)
  2. New Orleans (+32.4%)
  3. Tampa, FL (+25.7%)
  4. Las Vegas, NV (+24.6%)
  5. Oklahoma City, OK (+24.3%)

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

  1. Houston (-6.7%)

"Hurricanes, and particularly the flooding associated with these natural disasters, create the potential and opportunity for significant misrepresentation of collateral condition," said Fleming. "Evidence from monitoring application defect, misrepresentation and fraud risk after Sandy in the New York metropolitan area indicates that one should be on the lookout for increased risk in the markets impacted Harvey and Irma."

Natural Disasters Create Fraud Risk Opportunity

  • The devastating impact of Hurricanes Harvey and Irma on large parts of Texas and most of Florida continues to be assessed. Thankfully, recovery efforts are well underway and the rebuilding of homes has started. Yet, it should come as no surprise that in the wake of major natural disasters mortgage loan application fraud risk increases. Fraudulent or unintentional misrepresentation of collateral condition can be a significant risk for the lender.
  • In the aftermath of Hurricane Sandy, which impacted the New York City area in late October 2012, mortgage fraud, misrepresentation and defect risk based on the Defect Index increased 16.5 percent over four months in the New York metropolitan area.
  • Fraud and misrepresentation risk remained elevated for an entire year after the hurricane, before returning to a level consistent with the national index in late 2013.
  • The greater Houston and Tampa Bay markets were both significantly impacted by the recent hurricanes and will be markets to watch closely in the coming months for fraud and misrepresentation risk, especially related to collateral condition.
Chart: Current Defect Index Values

 

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.