The rate of critical defects in mortgage loans post closing decreased by 3.26% in the first quarter, ending the quarter at an overall rate of 1.78% and marking the second straight quarter of decline, according to ACES’ quarterly Mortgage QC Trends Report.
In the major underwriting categories, the rate of defects in the Assets and Income/Employment category decreased, while the rate of defects in the Credit and Liabilities category increased.
Despite its improvement in the first quarter, Income/Employment remained the leading defect category, followed by Assets and Legal/Regulatory/Compliance.
The sub-category analysis showed increases in eligibility-related defects for both the Assets and Credit categories, whereas this seems to have been the primary driver of improvements in the Income/Employment category.
However, analysis- and documentation-related errors both increased this quarter, with documentation remaining the largest sub-category of defects for both the Income/Employment and Asset categories.
Appraisal defects increased, albeit nominally, for the second straight quarter.
FHA defect share declined after two consecutive quarters of increase, while USDA defects continued to improve, VA defects increased significantly, and conventional defects grew slightly.
“While the drop in origination volume has challenged the industry, it has also enabled underwriting and QC teams to be more diligent with each loan file, resulting in higher loan quality,” says Nick Volpe, executive vice president, ACES, in the report. “The continued decline in the overall critical defect rate on the heels of last year’s historic high indicates lenders have not let the desire for volume override the need to reduce errors and mitigate risk.”
“With the recent changes to Fannie Mae’s pre-funding QC reviews and post-closing QC cycle times, time will tell in the following quarters how diligent lenders have been in maintaining loan quality and investor requirements,” Volpe adds.
Findings for the Q1 2023 ACES Mortgage QC Industry Trends Report are based on post-closing quality control data derived from the ACES Quality Management and Control benchmarking system.
Photo: Lance Grandahl