ARMCO: Technology Helped Lower Mortgage Defect Rate in Q1


The rate of critical defects in mortgage loans continued to fall in the first quarter, dropping to 1.82% of all loans, a decrease of 6% compared with 1.93% of all loans in the fourth quarter of 2018, according to the ARMCO QC Trends Report.

Although the rate of defects was down overall, there was a slight uptick in defects related to underwriting and eligibility, with more defects attributed to income/employment than any other category.

Critical defects attributed to missing, expired and/or incorrect documentation also increased, but the firm notes that this category has been more volatile lately.

Compliance-related critical defects fell to their lowest level since the first quarter of 2016, likely the result of greater lender investment in compliance technologies, the firm says.

Defects related to property and appraisal increased noticeably compared with the previous quarter but remained low overall.

Government-insured loans accounted for a slightly higher share of all loans in the benchmark, with FHA, VA and USDA loans comprising 41% of all loans reviewed.

The report is based on loan quality findings for about 90,000 mortgages reviewed by ARMCO’s ACES Audit Technology. 

“The first quarter revealed the loan quality correction we anticipated after the fourth quarter of 2018, but while there are many positives related to the overall market’s upturn, we saw an increase in defects related to key underwriting and eligibility functions,” says Nick Volpe, chief strategy officer for ARMCO, in a statement. “This continues a trend that persisted the entirety of 2018. Lenders shouldn’t take this lightly.” 

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

“Refi-dominant markets can have a positive impact on defect rates,” says Phil McCall, president of ARMCO. “But when volume goes up, individual workloads increase, turn times extend and mistakes tend to increase. Lenders who leverage technology wisely scale much better and expose themselves to fewer losses as a result.” 

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