The Drivers of Loan Application Defect Risk at the Local Level, According to First American’s Loan Application Defect Index
—The characteristics of the properties and loans involved in the real estate transactions in a given time period play an important role, says Chief Economist
- The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.2 percent compared with the previous month.
- Compared with
March 2017 , the Defect Index increased by 3.8 percent. - The Defect Index is down 19.6 percent from the high point of risk in
October 2013 . - The Defect Index for refinance transactions increased by 1.4 percent compared with the previous month, and is 11.1 percent higher than a year ago.
- The Defect Index for purchase transactions decreased by 2.2 percent compared with the previous month, and is up 2.3 percent compared with a year ago.
Chief Economist Analysis: What Drives Loan Application Defect Risk at the Local Level?
“A common adage about real estate is that it’s local. The dynamics of one housing market can be very different from another depending on the local economy and access to natural amenities, like mountains or water. The levels of loan application defect, fraud and misrepresentation risk vary greatly based on local conditions as well,” said
“Defect risk levels can change dramatically over time as well. In the last three months, six markets experienced an increase in defect, fraud and misrepresentation risk of more than 10 percent, while three other markets experienced a decrease of more than 10 percent. The point is, just as real estate is driven by local market conditions, so is defect risk,” said Fleming.
“But, what are some of the conditions that tend to influence defect risk levels the most? The characteristics of the properties and loans involved in the real estate transactions in a given time period play an important role. Transactions involving condominiums tend to carry higher defect risk than transactions involving single-family homes,” said Fleming. “Traditionally, defect risk has been greater in purchase transactions than refinance transactions. Transactions involving second homes or investment properties tend to carry elevated levels of defect risk as well.
“The Defect Index consistently identifies significant differences in risk in these areas. All else equal, a market with fewer refinance transactions, greater numbers of second home and investment property transactions and more multi-unit and condo property transactions will be riskier,” said Fleming. “Nonetheless, measuring loan application defect, fraud and misrepresentation risk at the local level summarizes local differences into a single measure that can be consistently compared across markets.
Defect Risk Dissipates in
“In March, the overall frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications decreased by 1.2 percent compared with the previous month and increased by almost 4 percent compared with a year ago,” said Fleming.
“Interestingly, there appears to be a high concentration of markets with elevated defect risk in the
- The five states with the greatest year-over-year increase in defect frequency are:
Wyoming (+19.0 percent),Arkansas (+17.8 percent),Virginia (+15.5 percent),Maryland (+15.3 percent) andNew Mexico (+14.7 percent). - The five states with the greatest year-over-year decrease in defect frequency are:
Louisiana (-11.8 percent),Minnesota (-8.4 percent),Connecticut (-6.9 percent),South Carolina (-6.8 percent) andNew York (-3.8 percent).
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the greatest year-over-year increase in defect frequency are:
Virginia Beach, Va. (+22.2 percent),San Diego (+20.0 percent),Los Angeles (+17.7 percent),Portland, Ore. (+15.9 percent), andOrlando, Fla. (+14.6 percent). - Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the largest year-over-year decrease in defect frequency are:
Minneapolis (-12.0 percent),Austin, Texas (-9.4 percent),Raleigh, NC (-8.2 percent),Buffalo NY (-5.9 percent), andNew Orleans (-4.5 percent).
Next Release
The next release of the First American Loan Application Defect Index will take place the week of
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. © 2018 by First American. Information from this page may be used with proper attribution.
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