First American Financial Corp. released the First American Loan Application Defect Index for January 2016, an index estimating 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.
The Defect Index remained unchanged in January compared with December, and decreased by 5 percent compared with January 2015. The Defect Index is down 25.5 percent from the high point of risk in October 2013.
The Defect Index has fallen 3.8 percent over the last three months, and January was the sixth consecutive month without an increase in defect and misrepresentation risk. The index remains at its lowest point since its inception. Although it’s difficult to know what a normalized level of defect risk is, the index value of 76 is significantly lower than in the three years between 2011 and 2013, when the index was consistently above a value of 90, First American said in a news release announcing the results.
The Defect Index for refinance transactions declined another 1.5 percent month-over-month, and is 9.7 percent lower than a year ago. The Defect Index for purchase transactions remained unchanged month-over-month, and is down 4.5 percent compared with a year ago. Since defect risk for both purchase and refinance transactions peaked in late 2013, defect risk on refinance transactions continues to decline much more than defect risk for purchase transactions, declining 35 percent as compared to 19.2 percent for purchase transactions.
“We are excited about the further clarification to the market by the Federal Housing Finance Agency that the GSEs will use an independent dispute resolution (IDR) process to resolve repurchase disputes as a result of loan application defects and fraud,” First American Chief Economist Mark Fleming said. “Based on the improving defect and fraud risk profile of recent loan applications, we expect the need for the IDR process to decline in the coming years as well.”
State Highlights
- The five states with the highest year-over-year increase in defect frequency are: South Carolina (+13.9 percent), the District of Columbia (+10.8 percent), Kentucky (+7.2 percent), Utah (+5.3 percent) and Texas (+4.9 percent).
- The five states with the highest year-over-year decrease in defect frequency are: South Dakota (-19.7 percent), Wyoming (-18.1 percent), Michigan (-17.6 percent), Maine (-17.6 percent) and Minnesota (-16.7 percent).
Local Market Highlights
- Among the largest 50 Core Based Statistical Areas (CBSAs), the five markets with the highest year-over-year increase in defect frequency are: Louisville, Ky. (+20.6 percent); Houston (+12.0 percent); Salt Lake City (+9.7 percent); Memphis, Tenn. (+7.2 percent); and Austin, Texas (+5.7 percent).
- Among the largest 50 CBSAs, the five markets with the highest year-over-year decrease in defect frequency are: Detroit (-21.1 percent); Birmingham, Ala. (-18.2 percent); Minneapolis (-16.1 percent); Cincinnati (-14.8 percent) and Riverside, Calif. (-13.4 percent).