Rate of Critical Defects in Mortgage Loans Dropped 8.38 Percent in Q4


The rate of critical defects in mortgage loans post-closing was 1.53% as of the end of the fourth quarter, according to ACES’ quarterly Mortgage QC Industry Trends Report.

That’s a year-over-year decrease of 19.18%, illustrating the vast improvement in lenders’ loan quality efforts, the firm says.

Compared with the third quarter of 2023, the critical defect rate declined 8.38%.

For calendar year 2023, the overall rate was 1.68% – a decrease of 19.18% compared with 2022.

Of the four major underwriting categories, the defect rate for Credit and Liabilities improved in the fourth quarter, while the rate increased for Assets and Income/Employment.

However, only one category – Credit – improved overall for calendar year 2023.

Income/Employment continued to be the leading category of defects reported in the fourth quarter, with Assets and Borrower and Mortgage Eligibility completing the top three categories of defects cited.

Income/Employment and Assets were also the top two most cited defect categories for calendar year 2023, with Loan Documentation in third place.

A sub-category analysis for both the fourth quarter and full-year 2023 showed a tremendous increase in Calculation/Analysis-related errors for the Assets category. Eligibility-related defects also increased in the Credit and Income/Employment categories in the fourth quarter, while calendar year 2023 saw moderate increases in Credit Documentation, Income/Employment Analysis and Eligibility.

“Building on the gains made in late 2022, mortgage lenders improved loan quality in both the fourth quarter of 2023 and for the year overall,” says Nick Volpe, executive vice president for ACES, in a statement. “However, persistent adversity in the form of interest rates and affordability challenges only emphasizes the need for lenders to remain vigilant and protect the integrity of existing loan production.”

“The overall critical defect rate for Q4 2023 dropped to 1.53%, among the lowest rates observed since this report’s inception. Given five straight quarters of decline, it’s evident lenders are prioritizing loan quality in the current market to preserve as much revenue as possible,” said Trevor Gauthier, CEO of ACES Quality Management. “The market downturn led to operational staff cuts for many lenders, and those reductions certainly impacted QC departments. Lenders’ ability to consistently drive down their critical defects in that environment speaks to the power of ACES to help lenders manage loan quality and mitigate risk in any environment.”

Photo: Ivan Vranić

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