A North-South Divide Emerges in Defect, Fraud and Misrepresentation Risk, According to First American Loan Application Defect Index

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 2016, 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 by loan type. It’s 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, as well as state and market comparisons of mortgage loan defect levels.

October Loan Application Defect Index

• The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, decreased 1.4 percent in October as compared with September.
• Compared to October 2015, 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 1.7 percent month-over-month, and is 15.9 percent lower than a year ago.
• The Defect Index for purchase transactions is unchanged compared to last month, and is down 5.9 percent compared to a year ago.

Chief Economist Analysis: Post-Election Rate Increase Pushes Market Toward Higher Risk Purchase Loans

“The post-election sudden increase in mortgage rates has accelerated the shift away from a refinance-driven market toward a purchase-dominated market,” said Mark Fleming, chief economist at First American. “Based on analysis of loan application defect risk trends, purchase loans are riskier, so I expect that the overall decline in loan application and defect risk will slow as rates continue to rise into 2017 and the share of higher risk purchase loans increases.”

A North-South Divide

“Defect, fraud and misrepresentation risk can vary substantially by location. In fact, the most recent data is showing a growing division between the North and South,” said Fleming. “Cotton states in the South are showing the highest levels of risk, compared to the northern rust-belt, where application and defect risk is currently the lowest.”

Additional Quotes from Chief Economist Mark Fleming

• “Defect risk is concentrating in the South, particularly in Arkansas and Louisiana, as well as in large markets in Texas and South Carolina.”
• “McAllen, Texas; Houston; Columbia, S.C.; Birmingham, Ala. and Charleston S.C. currently have the highest loan application defect and misrepresentation risk in the nation.”
• “New Orleans; Baton Rouge, La. and Little Rock, Ark. are also ranked highly for defect risk among the largest 100 metropolitan areas of the country.”
• “Comparatively, markets in the northeast states of New York, Pennsylvania, and Ohio have the least loan application defect and misrepresentation risk.”

October 2016 State Highlights

• The five states with the highest year-over-year increase in defect frequency are: Maine (+30.6 percent), South Dakota (+19.6 percent), Vermont (+15.1 percent), North Dakota (+11.1 percent), and Wyoming (+11.1 percent).
• The five states with the highest year-over-year decrease in defect frequency are: Michigan (-21.7 percent), Florida (-19.8 percent), California (-19.5 percent), Oklahoma (-17.0 percent), and Rhode Island (-16.7 percent).

October 2016 Local Market Highlights

• Among the largest 50 Core Based Statistical Areas (CBSAs), the only one market with year-over-year increase in defect frequency is: St. Louis (+4.2 percent).
• Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are: Louisville/Jefferson, Ky. (-28.9 percent); Detroit (-27.5 percent); Sacramento, Calif. (-25.3 percent); Orlando, Fla. (-24.7 percent); and Oklahoma City (-24.5 percent).

Next Release

The next release of the First American Loan Application Defect Index will be posted the week of December 26, 2016.

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. © 2016 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; and banking, trust and investment advisory services. With revenues of $5.2 billion in 2015, 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.

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