First American: December Fraud Risk Slows

First American Financial Corp., Santa Ana, Calif., said its monthly Loan Application Defect Index, which stabilized in November, fell again in December.

The overall Defect Index, which includes both purchase and refinance transactions, fell by 1.5 percent from November and is 23 percent lower than one year ago. While overall fraud risk declined in December, the pace of decline was slower than earlier in the year. The Defect Index for purchase transactions increased by 1.3 percent from November, while the Defect Index for refinance transactions fell 3.3 percent, its ninth straight month of declining risk.

First American said for the majority of 2019, overall fraud risk steadily declined, largely due to rising volume of lower risk refinance transactions driven by low mortgage rates.

“While declining fraud risk is the new norm, should market composition shift back toward a greater share of higher risk purchase transactions, or the sellers’ market strengthens even further, we can expect an even slower pace of decline, or even a return to rising fraud risk,” said First American Chief Economist Mark Fleming.

Fleming noted since fraud risk began to decline last March, the average monthly rate of decline has remained fairly constant at 4 percent. “While low mortgage rates and a healthy labor market continue to boost house-buying power and home-buying demand, inventory remains near quarter-century lows,” he said. In December, nearly half of all existing homes that came on the market were gone within the month. The current three months’ supply is much lower than the six months’ supply that is considered a balanced market. This strong sellers’ market may pressure some home buyers to misrepresent information on a loan application in order to be more competitive when bidding for a home. Couple a supply-constrained market with increased refinance share, and the pace of fraud risk decline slows down.”

The report said from a year ago, the Defect Index decreased by 16.0 percent. The Defect Index is down 34.3 percent from the high point of risk in October 2013.

No state with a year-over-year increase in defect frequency. States with the greatest year-over-year decrease in defect frequency were West Virginia (-42.7 percent), Alaska (-35.1 percent), North Carolina (-31.9 percent), Virginia (-31.5 percent), and Indiana (-35.1 percent).

Among major metros, no market saw a year-over-year increase in defect frequency. Markets with the greatest year-over-year decrease in defect frequency were Virginia Beach, Va. (-35.6 percent), Richmond, Va. (-35.3 percent), San Diego (-31.6 percent), Raleigh, N.C. (-31.1 percent) and Birmingham, Ala. (-29.9 percent).