The rate of critical defects in closed mortgages dropped to 1.72% of all loans sampled for ARMCO’s second quarter Mortgage QC Trends Report.
That’s a drop of 5.5% compared with the first quarter.
It’s also the second consecutive quarter that the overall rate of defects decreased.
Helping to drive the decrease in defects was an increase in refinances driven by lower mortgage rates. Refinances generally have lower defect rates because borrower data has previously been collected and verified. Therefore, as the refinance share of total loan volume increases, the rate of defects generally decreases.
However, fluctuations in volume can sometimes result in increased defect rates. That’s because mortgage lenders often respond to sudden spikes and dips by adjusting their labor forces through layoffs, downsizing, re-allocating staff and hiring.
“These changes upset the status quo and usually result in more defects, because staff instability increases errors and oversights,” says Nick Volpe, chief strategy officer at ARMCO, in the report. “When lenders adapt, usually when the market steadies, defects decrease. It is therefore safe to say that when lenders use technology that improves their scalability, they increase profitability faster than those who rely on manual processes.”
Also helping to drive the decrease in defect rates in the second quarter was a significant drop in defects related to income/employment and credit – both core underwriting functions. These two defect categories dropped 32.0% and 22.0%, respectively, compared with the first quarter.
Interestingly, critical defects on FHA loans underperformed conventional loans by a greater percentage than previous quarters.
ARMCO’s Mortgage QC Industry Trends Report is based on nationwide post-closing quality control loan data from more than 90,000 unique loans selected for random full-file reviews, as was data captured by the company’s ACES Analytics benchmarking software.
Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.