The rate of critical defects found in mortgages post-closing increased to 1.81% of all loans in the second quarter, according to ACES Quality Management (ACES), a provider of enterprise quality management and control software.
That’s an increase of 14.56% compared with the first quarter, the firm says in its latest Mortgage QC Industry Trends Report.
Persistent issues in Income/Employment category and significant defect growth across all major underwriting categories pushed the overall defect rate higher, the firm says.
Of the loans sampled from the second quarter, defects in the Income/Employment category increased 37.01%, followed by Assets at 14.29% and Credit at 9.79%.
Appraisal defects saw the most significant quarter-over-quarter growth across all categories, increasing by 98.33%.
Insurance defects reversed course from the first quarter, declining 91.99%.
Lenders continued to prioritize purchase reviews over refinances, with defect share rising 2.71% for purchase transactions and declining 11.66% for refinances.
Conventional and FHA review shares declined slightly in the second quarter. While VA review share increased somewhat, lenders significantly increased their reviews of USDA loans.
FHA and VA loan performance improved tremendously compared with Q1, declining 35.26% and 56.57%, respectively.
Conventional defect share increased by 13.59%, but the largest area of concern this quarter is USDA loan defects, which increased by 370.9%.
“This quarter’s rise in critical defects signals that lenders need to double down on quality control efforts, especially as volumes grow,” warns Nick Volpe, executive vice president of ACES Quality Management, in the report. “While the industry’s resilience is evident, the increased scrutiny of income and other key underwriting areas reminds us of the complexities in today’s lending landscape. Proactive adoption of digital tools is key to maintaining high standards and navigating an environment where even minor lapses can impact long-term performance.”
Photo: Markus Spiske
