Mortgage Fraud Risk on Purchase Transactions Rises for First Time Since March, According to First American’s Loan Application Defect Index

Business Wire

—The direction of defect risk in 2020 is in large part dependent on mortgage rates and how many homeowners that are “in the money” choose to refinance, says Chief Economist Mark Fleming—

SANTA ANA, Calif.--(BUSINESS WIRE)-- 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 November 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.

November 2019 Loan Application Defect Index

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same as the previous month.
Compared with November 2018, the Defect Index decreased by 16.0 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 1.6 percent compared with previous month, and decreased by 17.8 percent compared with a year ago.
The Defect Index for purchase transactions increased by 2.7 percent compared with the previous month, and is down 8.3 percent compared with a year ago.

Chief Economist Analysis: Overall Defect and Fraud Risk Flat in November

“As we predicted last month, the Loan Application Defect Index for purchase transactions reached a turning point in November. After falling since March, the Defect Index for purchase transactions increased 2.7 percent compared with October, while the Defect Index for refinance transactions fell by 1.6 percent, its eighth straight month of declining risk,” said Mark Fleming, chief economist at First American. “The overall Defect Index, which includes both purchase and refinance transactions, remained the same compared with last month, and is 16.0 percent lower than one year ago.

“Overall defect risk has been declining since March of this year, and November marks a pause to this trend. The reason for the change is two-fold,” said Fleming.

House-Buying Power Appreciation Slows

“When house-buying power – i.e. how much home one can buy based on changes in household income and interest rates – falls in a supply-constrained market fraud risk may increase. Potential home buyers feel more confident and less inclined to commit fraud when they are in a better financial position to purchase a home,” said Fleming. “While house-buying power remains high, the pace of growth slowed beginning in October, when mortgage rates began to inch up.

“In 2019, the average monthly growth rate of house-buying power through September was 1.6 percent. Over the two months of October and November combined, house-buying power declined 0.6 percent relative to September,” said Fleming. “The slowdown in house-buying power appreciation lessens the confidence of home buyers, so they may be more inclined to misrepresent information on a loan application, leading to an increase in the Defect Index for purchase transactions.”

Market Composition Shift

“In November, the volume of mortgage applications dipped 2.2 percent relative to one year ago, mostly driven by the 8 percent decline in refinancing activity. Purchase activity, however, increased 7 percent relative to one year ago,” said Fleming. “Defect, fraud and misrepresentation risk is significantly lower on refinance transactions, so the increased share of higher-risk purchase activity halted the decline in the overall defect index.”

Mortgage Rates, Refi Volume to Drive Defect Risk Trend in 2020

“Slightly higher mortgage rates through the end of the year may result in a small dip in house-buying power and a further pullback in refinance demand. But, looking ahead to 2020, mortgage rates are expected to remain below 4 percent. At that level, there are still 6.8 million borrowers today who could benefit financially by refinancing to a lower mortgage rate,” said Fleming. “As a result, the direction of defect risk in 2020 is in large part dependent on mortgage rates and how many homeowners that are ‘in the money’ choose to refinance.”

November 2019 State Highlights

There is no state with a year-over-year increase in defect frequency.
The five states with the greatest year-over-year decrease in defect frequency are: Alaska (-34.8 percent), West Virginia (-31.8 percent), North Carolina (-27.0 percent), Virginia (-26.4 percent), Indiana (-24.1 percent).

November 2019 Local Market Highlights

Among the largest 50 Core Based Statistical Areas (CBSAs), there is no market with the year-over-year increase in defect frequency.
Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year decrease in defect frequency are: Richmond, Va. (-30.9 percent), Virginia Beach, Va. (-30.2 percent), Oklahoma City (-27.2 percent), Raleigh, N.C. (-27.1 percent), and San Diego (-27.0 percent).

Next Release

The next release of the First American Loan Application Defect Index will take place the week of January 27, 2020.

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.