November 2017 Loan Application Defect Index

Where is Defect Risk 'Naughty' or 'Nice'?

"In the spirit of the holiday season, we've ranked the five states with the greatest defect risk as 'naughty' and the five states with the least defect risk as 'nice'," says Chief Economist Mark Fleming.

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

  • The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same compared with the previous month.
  • Compared to November 2016, the Defect Index increased by 22.1 percent.
  • The Defect Index is down 18.6 percent from the high point of risk in October 2013.
  • The Defect Index for refinance transactions remained unchanged compared with the previous month, and is 23.2 percent higher than a year ago.
  • The Defect Index for purchase transactions increased 1.1 percent month over month, and is up 13.8 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. South Dakota (+50.8%)
  2. North Dakota (+42.3%)
  3. New Mexico (+39.7%)
  4. Idaho (+36.0%)
  5. Iowa (+35.0%)

There is one state with a year-over-year decrease in defect frequency:

  1. Connecticut (-1.5%)

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

  1. Virginia Beach, VA (+49.2%)
  2. Orlando, FL (+35.2%)
  3. Miami (+34.2%)
  4. Louisville, KY (+31.0%)
  5. Kansas City, MO (+29.5%)

Among the largest 50 Core Based Statistical Areas (CBSAs), there is no market with a year-over-year decrease in defect frequency.

"As 2017 ends and we look forward to 2018, there is reason to be optimistic about defect, fraud and misrepresentation risk. After a year of significant change, defect risk has stabilized, with no change in the overall level of defect risk in three of the last four months," said Mark Fleming, chief economist at First American. "Keep in mind that the Loan Application Defect Index was at its lowest point ever in November 2016, before defect risk surged by 24 percent in the following seven months, one of the fastest changes the defect index has recorded since its inception in 2011. The increase was primarily driven by an increase in the share of purchase mortgage transactions, which tend to carry more risk, and more transactions in riskier markets. This fall, we have seen some moderation and stabilization of these market dynamics and, as a result, no further increase."

'Naughty or Nice': Defect Risk Varies Significantly By Region

In the spirit of the holiday season, we have created 'naughty or nice' lists for defect, fraud and misrepresentation risk. The states on the 'naughty' list had the greatest defect risk in November and the states on the 'nice' list had the least defect risk in November.

In November, the five states on our 'naughty' list, those with the greatest level of defect risk, were:

  1. Arkansas
  2. Idaho
  3. North Dakota
  4. Florida
  5. Montana

In November, the five states on our 'nice' list, those with the lowest level of defect risk, were:

  1. New Hampshire
  2. Connecticut
  3. Massachusetts
  4. Pennsylvania
  5. Maine

Interestingly, these states are all in the Northeast. In fact, New York is only slightly 'less nice' (riskier) than the five states that made the 'nice' list, and Vermont is the only 'naughty' market in the region.

As the Defect Index map shows, defect risk, or the lack thereof, is clearly concentrating regionally. The Northeast and California are generally low risk, while the South, Southeast and upper Midwest are generally higher risk.

States and Top 100 Markets

"There is the well-known adage that real estate is local and, when it comes to defect, fraud and misrepresentation risk, that adage may also apply regionally," said Fleming. "Yet, there is another well-known adage that correlation does not imply causation. A wise maxim to remember as we monitor defect risk trends and look forward to 2018."

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.