Critical Defect Rate Plummets Below 2%

Mortgage News June 29, 2023

ACES Quality Management, a company specializing in software services for quality management and control in the financial services sector, recently published its annual report on Mortgage QC Industry Trends for 2022. The report reveals a significant decrease in the critical defect rate during the fourth quarter of 2022 compared to the third quarter, resulting in a year-end rate of 1.84%, marking a 25.5% reduction.

In 2022, the average defect rate for the entire year was 2.07%, as two consecutive quarters experienced defect rates over 2%. ACES reported notable improvements in credit and moderate improvements in liabilities among the four major underwriting categories. Assets and income & employment saw significant increases, breaking the declining trend in income & employment over multiple quarters. Income & employment remained the primary category for reported defects, followed by assets and borrower and mortgage eligibility.

Appraisal defects also rose in the fourth quarter after a period of decline. The industry maintained a high purchase share and achieved defect parity for the quarter. Although FHA and conventional loans saw increased defects for two consecutive quarters, USDA and VA loan defects continued to improve.

ACES EVP Nick Volpe expressed optimism about the fourth quarter’s decline in the critical defect rate to below 2%, following a historic high of 2.47% in the previous quarter. He attributed this improvement to the significant impact of reduced origination volumes on lending operations. However, Volpe warned that lenders may face challenges as government-sponsored enterprises (GSEs) become more assertive in requesting loan repurchases for correctable defects.

Additionally, pending reviews of older FHA loan production by HUD, which has a reputation for defects, could further complicate matters. ACES CEO Trevor Gauthier emphasized the importance of a robust quality control (QC) auditing platform like ACES in mitigating financial risks posed by loan defects, enabling lenders to identify and address issues before they escalate into repurchase requests or sales on the secondary market.

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