First American Financial Corp., a global provider of title insurance, settlement services and risk solutions for real estate transactions, released the First American Loan Application Defect Index for July 2015, which estimates the frequency of defects 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 tailored to showcase trends by category, including amortization type, lien position, loan purpose, property and transaction types, as well as state and market-level comparisons of levels of mortgage loan defects.
The Defect Index rose 4.9 percent in July compared with June, and decreased by 5.6 percent from July 2014. The Defect Index is down 17.5 percent from the high point of risk in September 2013. After improving last month, the Defect Index worsened month-over-month, following the pronounced year-to-date trend, which has the Index up 10.4 percent. The frequency of loan application defects had shown a consistent downward trend since the peak in 2013 until the beginning of 2015.
The Defect Index for refinance transactions, while 6.3 percent lower than a year ago, has increased more dramatically in recent months, with estimated defect incidence up 8.7 percent month-over-month and 7.1 percent over the last three months. Although adjustable-rate mortgages, a loan type with a consistently higher level of application defects, remain higher risk, fixed-rate mortgage defect risk surged with an 8.4 percent increase from last month and a 9.6 percent increase over the last three months.
“After seeing improvement in the national mortgage loan defect trend last month, the index has returned to the trend of increasing risk that we have observed since the beginning of 2015. What remains consistent from last month is the concentration of defect risk in the same handful of key markets in the south, particularly in Florida and Texas, as well as in the Northeast and upper Midwest,” First American Chief Economist Mark Fleming said. “This month, major metropolitan areas in Florida and Texas continue to produce defect frequency levels well above the current national level.”
Over the past three months, the Loan Application Defect Index for Florida is up 4 percent and historically has remained higher than the national level of risk. This month, Florida ranks second, behind Michigan, among all states for defect risk. At the market level, Miami is the third-riskiest large metropolitan market in the country.
“This month, we focus on Florida because it is the second riskiest state in the nation and continues to struggle with the foreclosure crisis,” Fleming said. “While the condo market in Miami may have recovered dramatically, the stock of foreclosed properties remains high in many Florida markets. High levels of investor-owned condominium purchases in Miami and foreclosures throughout the state are all being reflected in the elevated defect risk that we are observing this year.”
Other highlights from the Default Index report are:
- The five states with the highest month-over-month increase in defect frequency are: Oklahoma (+14 percent), Hawaii (+13.1 percent), Louisiana (+10 percent), Texas (+10 percent) and Colorado (+9.3 percent).
- The five states with the highest month-over-month decrease in defect frequency are: Iowa (-11.4 percent), Massachusetts (-5.4 percent), Alaska (-5.3 percent), the District of Columbia (-4.7 percent) and West Virginia (-3.1 percent).
- Among the largest 100 Core Based Statistical Areas (CBSAs), the five markets with the highest quarter-over-quarter increase in defect frequency are: Oklahoma City, Okla. (+28.2 percent); Houston (+25.6 percent); McAllen, Texas (+25.0 percent); Austin, Texas (+21.3 percent) and Louisville, Ky. (+19.7 percent).
- Among the largest 100 CBSAs, the five markets with the highest quarter-over-quarter decrease in defect frequency are: Rochester, N.Y. (-28.6 percent); Wichita, Kan. (-12 percent); Richmond, Va. (-9.5 percent); Dayton, Ohio (-8.1 percent) and Springfield, Mass. (-6.9 percent).