ARMCO: Rate of Loan Defects Continued to Drop in Q3


Increasing refinance volume continued to drive down the rate of defects in mortgage applications in the third quarter of 2019, according to ARMCO’s most recent Mortgage QC Trends Report.

The overall rate of critical defects was 1.56%, a decrease of 9% compared with the second quarter and a decrease of 19% compared with the peak, which occurred in the fourth quarter of 2018.

It was the lowest overall defect rate since the fourth quarter of 2016, ARMCO says. 

The percentage of government loans reviewed during the third quarter fell, as the interest rate environment drove more conventional refinances, resulting in a 10% improvement on FHA loan defects compared to the previous quarter.

Defect performance for purchase loans also improved, with defect categories related to core underwriting and qualification showing improvements when compared with the second quarter of 2019.

There was an increase in property/appraisal defects driven by the lasting effects of Hurricane Dorian, Hurricane Humberto and the multiple wildfires in Northern and Southern California, ARMCO says.

“The driving force behind the third quarter’s strong critical defect rate is the increase in refinances, which accounted for 40 percent of the overall volume of loans reviewed,” says Nick Volpe, executive vice president, ARMCO, in a release. “Given the current rate environment and overall mortgage market conditions, ARMCO’s outlook for both the critical defect rate and the market as a whole remains incredibly strong.”

But just because refinance volume is expected to grow doesn’t necessarily mean the rate of defects is expected to decrease. 

“While refinance transactions generally result in fewer defects, volume spikes can often have the opposite impact on loan quality,” explains Phil McCall, president of ARMCO. “Leveraging technology helps lenders better manage mortgage volume peaks and valleys while always keeping the focus on loan quality.”

ARMCO’s Mortgage QC Industry Trends Reports are based on nationwide post-closing quality control loan data from over 90,000 unique loans selected for random full-file reviews, as was captured by the company’s ACES Analytics benchmarking software.

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

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