Rate of Critical Defects in Mortgage Loans Continued to Rise in Q4


The rate of critical defects in mortgages reviewed post-closing increased 2% in the fourth quarter compared with the third quarter of 2018, according to ARMCO’s QC Trends Report.

The critical defect rate reached 1.93%, up from 1.89% the previous quarter.

The previous quarter, the rate of critical defects increased 11%.

For calendar year 2018, the critical defect rate was 1.81%. That’s up almost 8% compared with 1.68% in 2017.

“Critical defects in 2018 reflect the market’s rising interest rates and continued escalation of property values,” explains Nick Volpe, chief strategy officer for ARMCO, in a statement. “Fewer highly qualified borrowers transact mortgages when rates increase, which fills the market with more marginal borrowers who tend to require more documentation. It makes sense that defects related to loan package documentation more than doubled from 2017 to 2018.”

Defects related to income and employment represented 20.39% of all critical defects in the fourth quarter. This defect category increased 63% compared with the third quarter, the report shows.

Defects related to loan package documentation represented 15.53% of all serious defects in the fourth quarter. ARMCO points out that defects attributed to loan package documentation more than doubled between 2017 and 2018.

Credit-related defects represented 18.45% of all critical defects in the fourth quarter.

However, the bulk of critical defects were related to underwriting and eligibility. Those comprised over 65% of all critical defects during the fourth quarter.

The firm noted that in calendar year 2018, FHA loans accounted for roughly 31% of the loans reviewed but represented approximately 41% of loans containing critical defects.

“As the market fluctuates, so do the distribution and frequency of defects, and if lenders aren’t prepared, that can end up costing them a lot in price adjustments, fees, investor delays and even buybacks,” says Phil McCall, president of ARMCO. “Analytical QC technologies enable lenders to catch the defects and proactively prevent them so they can protect their profits. In shifting markets, where defects are like moving targets, that’s more important than ever.”

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