Rate of Critical Defects Fell Again in Q1, as Mortgage Lenders Prepare to Stretch the Credit Box


The rate of critical defects in mortgage loans stood at 1.93% as of the end of the first quarter of 2022, down 0.2% compared with the fourth quarter of 2021, according to the ACES Quality Management Mortgage QC Industry Trends Report, which analyzes defect rates post-closing.

It was the second straight quarter that the rate of critical defects dropped – despite the challenging mortgage lending environment.

However, defects in the “income/employment” category continue to remain high.  

“Despite an overall decline in the critical defect rate for the first quarter, the Income/Employment category remains a glaring problem,” says Nick Volpe, executive vice president of ACES, in the report. “Lenders are finding this area a difficult one to rectify, and with staffing changes and new products coming online, it is more important than ever that QC managers get granular findings and feedback to their production group. Additionally, as lenders expand the credit box to win the fight for volume, they must be careful not to stretch too far and further exacerbate defects in this category.”

The report indicates that the critical defect rate could rise in the third quarter, as lenders widen the credit box in the hunt for volume.

Still, technology and tight underwriting standards should keep the overall defect rate from increasing dramatically.

“While the defect increases in three of the four ‘core underwriting’ categories are cause for concern, it was not all ‘doom and gloom’ for the first quarter,” Volpe says. “Out of the 11 primary loan defect categories ACES tracks, five showed considerable improvement over last quarter, and none more so than the Documentation category, which dropped 37 percent, from 14.57 percent to 9.09 percent.

“This is a tangible example of the importance of quality control reporting,” he adds. “With quality control and quality assurance testing, lenders can course correct and improve the overall quality of their mortgage originations.”

In addition, low volume will continue to give lenders more ability to stabilize their processes, keeping defects at bay.

Photo: Tierra Mallorca

Notify of
Inline Feedbacks
View all comments