Mortgage Fraud Risk Reaches Turning Point, According to First American’s Loan Application Defect Index

— As sellers’ market conditions ease their grip on the broader housing market, defect risk on purchase transactions remains likely to fall, says Chief Economist Mark Fleming—

SANTA ANA, Calif.--()--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 2019, 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 2019 Loan Application Defect Index

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.4 percent compared with the previous month.
  • Compared to October 2018, the Defect Index decreased by 13.9 percent.
  • The Defect Index is down 33.3 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions decreased by 3.2 percent compared with the previous month, and decreased by 14.1 percent compared with a year ago.
  • The Defect Index for purchase transactions remained the same as the previous month, and is down 8.5 percent compared with a year ago.

Chief Economist Analysis: Overall Defect and Fraud Risk Continues Slide

“Based on our analysis, if mortgage rates continue to fall, the pressure on fraud risk may weaken. This has played out throughout most of 2019, as the 30-year, fixed mortgage rate has been falling since December 2018, and overall fraud risk alongside it,” said Mark Fleming, chief economist at First American. “Fraud risk began declining in March 2019 and reached a historical low in October. The Loan Application Defect Index for refinance transactions has followed a similar trend, declining 14.1 percent between March and October 2019.

“However, defect risk for purchase transactions broke its six-month streak of declines in October. While still 8.5 percent lower than one year ago, defect risk remained flat compared with the previous month,” said Fleming. “October was also the first month since November 2018 where the 30-year, fixed mortgage rate increased month over month. Examining any potential link between defect risk trends and mortgage rates may shed light on what to expect for defect risk in the near future.”

The Relationship Between House-Buying Power and Fraud Risk

“House-buying power is how much home one can buy based on changes in household income and interest rates,” said Fleming.When household income rises, consumer house-buying power increases. Decreasing mortgage rates also boost house-buying power.

“Since December 2018, house-buying power has been increasing due to steadily rising household income and declining mortgage rates. In fact, house-buying power reached $421,120 in September 2019, the highest point in our analysis dating back to 1990,” said Fleming. “Yet, in October, when mortgage rates increased month over month for the first time since November 2018, house-buying power declined as well, falling 0.8 percent compared with the previous month. How might the mortgage rate-driven decline in house-buying power have played a role in ending the six-month decline in defect risk for purchase transactions?

“Potential home buyers may feel more confident and less inclined to commit fraud when they are in a better financial position to purchase a home,” said Fleming. “In a supply-constrained market, a decline in house-buying power makes it more difficult for potential home buyers to compete with each other, so they may feel more pressure to misrepresent information on a loan application.

“It’s important to remember that one month does not make a trend. House-buying power may decline further, but should remain strong by any recent historic standard. Additionally, new home construction is accelerating,” said Fleming. “More new homes may weaken the squeeze on supply and reduce competition among buyers and the pressure to misrepresent information on a loan application. As sellers’ market conditions loosen their grip on the broader housing market, defect risk on purchase transactions remains likely to fall.”

October 2019 State Highlights

  • The two states with a year-over-year increase in defect frequency are: South Dakota (+4.8 percent) and New York (+2.4 percent).
  • The five states with a year-over-year decrease in defect frequency are: Alaska (-34.4 percent), West Virginia (-22.5 percent), Virginia (-21.7 percent), Delaware (-20.3 percent), and North Carolina (-20.2 percent).

October 2019 Local Market Highlights

  • Among the largest 50 Core Based Statistical Areas (CBSAs), only one market had a year-over-year increase in defect frequency: Hartford, Conn. (+3.2 percent).
  • Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with a year-over-year decrease in defect frequency are: Virginia Beach, Va. (-25.8 percent), San Diego (-25.3 percent), San Antonio (-24.3 percent), Richmond, Va. (-23.7 percent), and Raleigh, N.C. (-23.2 percent).

Next Release

The next release of the First American Loan Application Defect Index will take place the week of December 30, 2019.

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. © 2019 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 $5.7 billion in 2018, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2019, First American was named to the Fortune 100 Best Companies to Work For® list for the fourth consecutive year. More information about the company can be found at www.firstam.com.

Contacts

Marcus Ginnaty
Corporate Communications
First American Financial Corporation
(714) 250-3298

Contacts

Marcus Ginnaty
Corporate Communications
First American Financial Corporation
(714) 250-3298