The rate of critical defects in mortgage loans post-closing decreased by nearly 17% in the third quarter, ending the quarter at 1.51%, according to ACES Quality Management Mortgage QC Trends Report.
However there was a sharp rise in insurance defects compared with the previous quarter.
Insurance defects increased more than four-fold to 3.03%, up from a nominal .65% in the second quarter.
Defects in this category saw volatility throughout 2024: In the first quarter the share stood at 8%.
ACES notes that fluctuations in key underwriting categories reinforce the need for quality control.
“The drop in the overall critical defect rate in the third quarter is a welcome shift, but the underlying trends tell a more complex story,” says Nick Volpe, executive vice president of ACES Quality Management, in a statement. “The sharp rise in insurance defects, combined with fluctuations in key underwriting categories, reinforces the need for lenders to stay agile in their quality control efforts. As market conditions evolve, leveraging technology and data-driven insights will be critical to maintaining loan integrity and mitigating future risk.”
The report analyzes post-closing quality control data derived from ACES Quality Management & Control software.
In the third quarter, Income/Employment was again the leading category of defects at 25%, followed by Assets at 16.67%. Credit and Loan Documentation tied for the third most defects at 12.12% each.
Mirroring the origination environment in the third quarter, mortgage lenders increased their reviews of refinances while defect share declined.
Purchase defect share increased despite a decrease in purchase reviews.
Conventional review share increased slightly in the third quarter, while FHA, USA and VA loan reviews decreased.
Defects declined significantly for conventional and USDA loans this quarter, while FHA defect share increased by 25%.
VA defect share increased significantly in the third quarter, though primarily driven by a temporary phenomenon.
Photo: Lance Grandahl