ARMCO: Critical Defects in Mortgage Loans Increased 9% in Q2 2017

Critical defects in mortgage loans increased in the second quarter of 2017, rising 9% compared with the first quarter of 2017, according to ARMCO’s Mortgage QC Trends Report.

It was the third consecutive quarter that the overall rate of defects increased.

The report is based on data collected from ARMCO’s financial quality control and compliance software, ACES Audit Technology.

The main reason that the rate of defects increased was the shift to a purchase market, which began in early 2017 and continues today.

Typically, the defect rate for purchase loans is higher than that of refinances because underwriting for the borrower is taking place for the first time.

About 1.76% of loans audited had critical defects in the second quarter of 2017, according to the report.

The top critical defect category was “borrower and mortgage eligibility.”

“We’re seeing a continuation of critical defect activity that aligns with what we’d expect in a purchase-driven market,” says Phil McCall, president of ARMCO, in a statement. “If they haven’t already done so, lenders should consider how they’ll address these specific loan quality issues if purchases continue to dominate the market.”

The report is based on nationwide post-closing quality control loan data from more than 90,000 loans selected for random full-file reviews.

Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.


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