—The future of fraud and misrepresentation risk is tied closely to
mortgage rates, says Chief Economist Mark Fleming—

SANTA ANA, Calif.–(BUSINESS WIRE)–First
American Financial Corporation (NYSE: FAF), a leading
global provider of title insurance, settlement services and risk
solutions for real estate transactions, today released the First
American Loan Application Defect Index for April 2019, which
estimates 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 loan type. It is 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, and can provide state- and market-specific comparisons of
mortgage loan defect levels.

April 2019 Loan Application Defect Index

• The frequency of defects, fraudulence and misrepresentation in the
  information submitted in mortgage loan applications decreased by 4.2
  percent compared with the previous month.
• Compared to April 2018, the Defect Index increased by 11.0 percent.
• The Defect Index is down 10.8 percent from the high point of risk in
  October 2013.
• The Defect Index for refinance transactions decreased by 3.5 percent
  compared with previous month, and is up 16.9 percent compared with a
  year ago.
• The Defect Index for purchase transactions decreased by 4.0 percent
  compared with the previous month, and is up 10.3 percent compared with
  a year ago.

Chief Economist Analysis: Lower Mortgage Rates Help Break Defect Risk
Trend

“The frequency of defects, fraudulence and misrepresentation in the
information submitted in mortgage loan applications declined 4.2 percent
compared to last month. Notably, this marks the first month-over-month
decline since July 2018, thanks to lower mortgage rates,” said Mark
Fleming, chief economist at First American. “Decreasing mortgage rates
contributed to an increase in inventory, reducing the competitive
pressure on the housing market, as well as contributing to an increase
in lower-risk refinance transactions. In line with this trend, the Loan
Application Defect Index for purchase transactions declined for the
first time in eight months, falling 4.0 percent in April compared with
the previous month.

“The two competing trends that resulted in a flat fraud risk last month
were the increasing share of less risky refinance transactions working
to decrease overall fraud risk, and the continuation of the hot sellers’
market, motivating buyers to misrepresent information in order to
qualify for a bigger mortgage and increase overall fraud risk,” said
Fleming.

“The mix of refinance and purchase activity fluctuated within the month
of April. Refinance
activity increased in the first half of the month as mortgage rates
declined. However, lower mortgage rates also fueled an increase in
purchase transactions, as buyers took advantage of their increased
house-buying power,” said Fleming. “In fact, purchase
applications hit their highest level in nine years towards the end
of April. While loan application defects can happen on both purchase or
refinance transactions, there is a higher propensity for fraud and
misrepresentation with purchase transactions.

Increased Inventory Cools Misrepresentation Pressure

“However, the decline in mortgage rates had a third and even more
important consequence, which was to help alleviate some of the supply
constraints that made the housing market so competitive,” said Fleming.
“As we saw in last
month’s report, in extremely competitive markets, there is more
motivation to misrepresent information on a loan application to qualify
for the bigger mortgage in order to win the bidding war.

“Most recently, real estate agents indicate that their buyers
are encouraged by an unexpected surge of supply. April did see an increase
in total housing inventory, rising to 1.83 million from 1.67 million
in March, which is a 1.7% increase year-over-year. Potential buyers feel
less inclined to misrepresent information on a loan application when
they don’t feel the pressure of a hot sellers’ market. Indeed,
misrepresentation of income and employment both fell this month, by 1.7
percent and 3.6 percent respectively,” said Fleming.

“The future of fraud and misrepresentation risk is tied closely to
mortgage rates. Increased inventory reduces competitive pressures and
misrepresentation risk, alongside the rising share of lower-risk
refinance transactions,” said Fleming. “It remains to be seen if
mortgage rates, now flirting with 4 percent, will go any lower. If so,
we may anticipate the continued downward trend in defect risk and
misrepresentation, with further increases in refinance transactions and
inventory, resulting in less pressure on the market.”

April 2019 State Highlights

• The five states with a year-over-year increase in defect frequency
  are: New York (+37.3 percent), Nebraska (+37.0 percent), Iowa (+35.0
  percent), Hawaii (+33.7 percent), and West Virginia (+31.1 percent).
• There are two states with the year-over-year decrease in defect
  frequency: Arkansas (-4.8 percent) and Florida (-1.1 percent).

April 2019 Local Market Highlights

• Among the largest 50 Core Based Statistical Areas (CBSAs), the five
  markets with the greatest year-over-year increase in defect frequency
  are: Buffalo, N.Y. (+36.9 percent), Pittsburgh (+31.3 percent),
  Richmond, Va. (+30.1 percent), Cincinnati (+29.3 percent), and New
  York (+26.3 percent).
• Among the largest 50 Core Based Statistical Areas (CBSAs), the five
  markets with year-over-year decrease in defect frequency are:
  Jacksonville, Fla. (-11.6 percent), Houston (-8.5 percent), Orlando,
  Fla. (-7.4 percent), San Diego (-4.3 percent), and Miami (-2.0
  percent).

Next Release

The next release of the First American Loan Application Defect Index
will take place the week of June 24, 2019.

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. © 2019 by First
American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a leading
provider of title insurance, settlement services and risk solutions for
real estate transactions that traces its heritage back to 1889. First
American also provides title plant management services; title and other
real property records and images; valuation products and services; home
warranty products; property and casualty insurance; banking, trust and
wealth management services; and other related products and services.
With total revenue of $5.7 billion in 2018, the company offers its
products and services directly and through its agents throughout the
United States and abroad. In 2019, First American was named to the Fortune 100
Best Companies to Work For^® list for the fourth consecutive
year. More information about the company can be found at www.firstam.com.

Contacts

Marcus Ginnaty
Corporate Communications
First American
Financial Corporation
(714) 250-3298