First American: Defect, Fraud Risk Remains Low Despite First-Time Demand

First American Financial Corp., Santa Ana, Calif., said its Loan Application Defect Index fell further in September, by 1.4 percent from August.

The Index, which measures frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications, fell by nearly 15 percent from a year ago and by more than 32 percent from its high point in October 2013.

First American reported the Defect Index for refinance transactions unchanged compared from last month and nearly 17 percent lower than a year ago; the Defect Index for purchase transactions increased by 1.3 percent month-over-month, but fell by 8.0 percent compared to a year ago.

First American Chief Economist Mark Fleming said the transition to higher risk purchase-driven market did not appear to be slowing down declines in defect risk.

“The market is in transition toward a greater volume of riskier purchase loans, away from a market dominated by lower risk refinance loans; yet, overall the defect index continues to decline, which is a testament to the effort the mortgage finance industry is making to improve the loan production process,” Fleming said. “The widespread implementation of data- and technology-enabled loan manufacturing processes is benefiting consumers across the country. The mortgage finance industry continues to improve, producing loans with fewer defects and producing those loans right the first time.”

Other report highlights:
— States with highest year-over-year increases in defect frequency were Maine (+25.5 percent), North Dakota (+14.8 percent), South Dakota (+11.3 percent), Vermont (+10.4 percent) and Missouri (+7.2 percent).
–States with highest year-over-year decreases in defect frequency were Michigan (-26.5 percent), Florida (-24.2 percent), California (-21.0 percent), Oklahoma (-19.8 percent) and Nevada (-19.7 percent).
–Among the largest 50 metro areas, the only market with year-over-year increase in defect frequency was St. Louis (+1.4 percent). Markets with the highest year-over-year decrease in defect frequency were Detroit (-31.8 percent); Louisville/Jefferson, Ky. (-28.2 percent); Orlando, Fla. (-27.8 percent); Oklahoma City (-27.8 percent); and Dallas (-24.5 percent).

Fleming said all 100 major metropolitan areas tracked have had a defect, fraud and misrepresentation level below the benchmark national January 2011 level since this February. Three markets–Scranton, Pa.; Rochester, N.Y. and Toledo, Ohio–have risk levels 50 percent below the benchmark national level.”

“Defect risk levels across different markets are becoming more homogenous because the benefits of more robust and data-driven loan production processes apply equally from market to market,” Fleming said. “The dispersion, or amount of difference in defect risk across markets, has declined 18.6 percent over the past year.”