The overall critical defect rate for mortgage loans post-closing increased to 1.31% in the first quarter, ending a two-quarter improvement streak, according to the ACES Q1 2025 Mortgage QC Industry Trends Report.
That’s a 12.93% increase compared with the fourth quarter.
Underwriting pressures, shifting borrower profiles and market volatility are testing lenders’ quality control processes, ACES says.
By defect category, Income/Employment defects increased 42.5%, reclaiming in the top spot at 22.99% of all critical defects.
Borrower and Mortgage Eligibility defects surged 328.57% quarter-over-quarter, while Credit defects rose 11.96%, according to the report.
Meanwhile, the Assets, Legal/Regulatory/Compliance and Appraisal categories posted significant improvements.
The refinance defect share increased despite a drop in review volume, while purchase defect share declined.
“The rise in critical defects this quarter underscores how market volatility and operational pressure can impact loan quality,” says Nick Volpe, executive vice president at ACES Quality Management, in the report. “At the same time, we’re seeing that lenders who invest in automation and proactive quality control are making measurable improvements, particularly in underwriting and compliance.”
Photo: Lance Grandahl