Rate of Defects in Mortgage Applications Jumped in Q3 Due to Surging Purchases


Due to increasing purchase volume, the rate of critical defects in mortgage applications increased 25% in the third quarter of 2020 compared with the second quarter of 2020, hitting a five-year high, according to ACES’ Mortgage QC Industry Trends Report.

The overall critical defect rate of 2.34% represents a marked increase from prior quarters and is the highest observed since ACES began publishing the QC Trends Report in 2016.

The share of manufacturing-related defects increased, although defects related to income/employment fell.

“Without a doubt, the third quarter’s critical defect rate was the highest we’ve seen since ACES began publishing the QC Trends Report in 2016, and while there are multiple factors that attributed to the 25 percent increase in critical defects, the majority of them were COVID-related,” explains Nick Volpe, executive vice president for ACES, in a statement. “Given that many of these factors are still at play, we expect to see continued volatility in defect rates for at least several more quarters. However, we did see a decline in EPDs in the fourth quarter of 2020 to just 110 percent of their pre-pandemic levels, which provides a measure of optimism after hitting a 200 percent increase in the third quarter.”

The report is based on post-closing quality control data from approximately 100,000 unique loans, categorized using the Fannie Mae loan defect taxonomy and incorporates data from prior quarters and/or calendar years, where applicable.

All reviews and defect data evaluated for the report were based on loan audits selected by lenders for full file reviews.

“Despite record interest rate lows, there was still plenty of volatility in the mortgage markets in 2020, as evidenced by the data from the third quarter,” says Trevor Gauthier, CEO of ACES. “With the pandemic’s end not quite yet in sight, lenders need to remain vigilant of the trends impacting their loan quality. More than ever, the transparency ACES provides lenders into their loan performance as compared to their peers delivers valuable insights that can help these institutions not only identify where they are currently falling short in terms of loan quality, but also highlight areas to watch in the future based on industry trends. That ability to be proactive in mitigating defects and risk cannot be overstated, especially in the midst of market volatility and high volumes.”

Photo: Bill Oxford

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