The rate of critical defects in mortgage loans post-closing increased 6% in the second quarter, compared with the first quarter, driven in part by “geopolitical and macroeconomic events,” according to the lates ACES Quality Management Mortgage QC Industry Trends Report.
“The geopolitical and macroeconomic events surrounding the second quarter are most certainly the driving factors behind the increase in the overall critical defect rate past the 2 percent threshold,” says Nick Volpe, president of ACES, in the report. “While the Income/Employment category improved tremendously this quarter, significant defect increases in the Loan Documentation, VA and USDA categories are cause for concern.”
While Income/Employment defects continue to represent the majority of defects reported, this category’s overall share of defects decreased compared with the first quarter.
Loan Documentation defects increased significantly in the second quarter, with Closing Documentation errors comprising the vast majority of these defects, according to the report.
Appraisal defects continued to trend downward for the second straight quarter, improving slightly compared with the first quarter.
Purchase share increased in the second quarter, reflecting the shift from a refinance market, while conventional loan share remained essentially unchanged.
Although FHA share increased slightly in the second quarter, defects declined significantly in this category over the previous quarter, as per the report.
Conversely, VA and USDA defects increased remarkably, despite only modest gains in review share, with VA defects more than doubling from the previous quarter.
“With interest rates skyrocketing and severe declines in volume and profitability, the second quarter was the perfect storm for the mortgage industry,” says Trevor Gauthier, CEO for ACES. “The market disruption combined with increased competition certainly created ample opportunity for loan defects, hence the increase in [the] overall critical defect rate.
“The takeaway for lenders moving forward is to double down on quality control and risk mitigation to protect the volume they can capture and ensure buyback requests don’t diminish profits,” Gauthier adds.