November 2018 Loan Application Defect Index

Defect Risk Jumps Nationally, Partially Influenced by Rising Defect Risk in California Wildfire Areas

"The question is not if defect risk will continue to increase, but when will it stop," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 2.5 percent compared with the previous month.
  • Compared to November 2017, the Defect Index decreased by 2.4 percent.
  • The Defect Index is down 20.5 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions increased by 2.8 percent compared with previous month, and is up 5.8 percent compared with a year ago.
  • The Defect Index for purchase transactions increased by 2.4 percent compared with the previous month, and is down 7.7 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. Alaska (+19.5%)
  2. Hawaii (+15.4%)
  3. West Virginia (+13.3%)
  4. Maine (+12.5%)
  5. New York (+11.7%)

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

  1. Vermont (-24.0%)
  2. Minnesota (-15.5%)
  3. Florida (-14.1%)
  4. Arizona (-14.1%)
  5. Arkansas (-12.4%)

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

  1. San Diego (+20.3%)
  2. Richmond, VA (+17.4%)
  3. Los Angeles (+14.8%)
  4. Buffalo, NY (+13.4%)
  5. Pittsburgh (+12.1%)

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

  1. Houston (-20.2%)
  2. Minneapolis (-18.5%)
  3. Jacksonville, FL (-17.5%)
  4. Tampa, FL (-15.8%)
  5. Birmingham, AL (-14.6%)

"The tragic impacts of the Woolsey and Camp fires continue to be assessed and, unfortunately, appear to include rising fraud and defect risk. Given historical trends, the question is not if defect risk will continue to increase, but when will it stop," said Mark Fleming, chief economist at First American.

Fraud and Defect Risk Follows Historic Trends in Wildfire-Impacted Areas

Chart: Monitoring Fraud and Defect Risk in California Cities Impacted by Wildfires

The staggering scope of the damage and loss of life from California’s early November wildfires continues to grow. The Camp Fire in Butte County, the deadliest U.S. wildfire in a century, impacted 16,735 properties worth $3.8 billion dollars, according to data from DataTree by First American. This number is even higher when you consider other insured losses, in addition to the value of the home. The Woolsey Fire, which spanned Los Angeles and Ventura counties, was slightly smaller in size, but also had a devastating impact and ultimately destroyed over 1,600 structures.

Historical data indicates that natural disasters and loan application defect risk go hand-in-hand, as they increase the potential for misrepresentation of collateral condition. In last month’s post, we discussed the potential implications of the recent California wildfires on mortgage fraud risk, and after examining the first month of data, it appears historical trends are playing out.

Following the Woolsey and Camp fires, defect and fraud risk has increased in all three of the affected metropolitan areas. Fraud and defect risk increased the most in Oxnard, rising 6.0 percent compared to October, followed by Los Angeles (3.3 percent) and San Francisco (2.8 percent). Before the November increase, fraud and defect risk was relatively flat in all three metropolitan areas.

The tragic impacts of the Woolsey and Camp fires continue to be assessed and, unfortunately, appear to include rising fraud and defect risk. Given historical trends, the question is not if defect risk will continue to increase, 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.