ACES Quality Management: Critical Defect Rate Up in Q1

(Image courtesy of ACES)

ACES Quality Management, Denver, released its Mortgage QC Industry Trends report for the first quarter, finding a modest increase in the critical defect rate to 1.58%.

That’s the first increase after five consecutive quarters of decline, but still remains very low compared to historical levels. On the flip side, origination activity was at the lowest level since 2000, so an increase in the defect level in that context is somewhat concerning.

Income/employment remained the leading category of defects, but did improve compared with Q4 2023. It dropped from 36.43% in Q4 2023 to 23.42% in Q1.

Legal/regulatory/compliance defects saw a jump, by 208.37%, rendering it the second-highest category of defects at 16.22%. ACES pointed to a number of state and federal changes that went into effect in the quarter and could have sparked the issues.

Loan documentation was the third highest category, at 14.41%.

Assets and liabilities saw mixed results, with defects in the assets category down by 32.27% to 11.71% of all defects, and liabilities up by 6.5% to 7.21% of defects.

Insurance defects–usually a very low number–reached 8.11%.

“Despite the modest increase in critical defects this quarter, the data shows lenders continue to progress in key underwriting areas. However, the significant rise in Credit and Legal/Regulatory/Compliance defects highlights the need for greater diligence. Maintaining quality is crucial in today’s challenging lending environment. Lenders must pay close attention to both regulatory shifts and market dynamics to ensure long-term stability,” said Nick Volpe, Executive Vice President of ACES Quality Management.

Of some concern: refinance review share declined, but the defect share increased. Relatedly, defect share outstripped review share for conventional loans.

Review share and defect share both declined in the FHA category, and there was notable improvement in VA defect share.