ARMCO: Risk of Serious Defects in Mortgage Applications Jumped 7% in Q1


The risk of critical defects in mortgage applications increased 7% in the first quarter compared with the fourth quarter, due primarily to the shift toward a purchase market, according to ARMCO’s Mortgage QC Trends Report.

In total, about 1.61% of mortgage applications were at risk for fraud during the quarter.

Driving the increase is the fact that applications for purchases now comprise about 63% of all applications, according to the report. That’s up from 51% in the first quarter of 2016.

Applications for purchases are generally at greater risk for errors of defects because borrowers are submitting information for verification for the first time. What’s more, there is a greater number of participants in the transaction – plus a purchase is generally more complex than a refinance.

Applications for mortgages backed by the Federal Housing Administration accounted for a disproportionately high number of critical defects in the first quarter, according to the report, which is based on data collected via ARMCO’s ACES Analytics benchmarking software.

“The increase in the critical defect rate is the result of the purchase-dominated market we saw in the first quarter of this year,” says Phil McCall, president of ARMCO, in a statement. “Purchase transactions bring a lot more moving parts, and a lot more opportunity for errors and misrepresentations. Whether that rate continues to rise will depend in large part on the ratio of purchases to refinances as we move forward.”

The ACES Analytics benchmarking dataset includes post-closing quality control data from more than 65 mortgage lenders, comprising more than 75,000 unique loans selected for random full-file reviews. Defects are categorized using the Fannie Mae loan defect taxonomy.

ARMCO issues a one-year analysis for the calendar year with each fourth quarter report.

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