ACES: Critical Defect Rate Falls to Annual Low

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ACES Quality Management, Denver, reported the overall fourth-quarter critical defect rate fell to 1.38%, a 22.9% decrease from 1.79% in Q3 2025, marking the first quarterly decline after three consecutive quarters of increases.

ACES latest Mortgage QC Industry Trends Report covers both Q4 2025 and the full calendar year 2025. The report analyzes post-closing quality control data derived from the ACES Quality Management & Control software.

Other findings from the report include:

Calendar year 2025’s average critical defect rate was 1.50%, essentially flat from calendar year 2024’s 1.52% (-1.32%).

Legal/Regulatory/Compliance returned to the top defect category in Q4 2025, rising 30% from 18.9% to 24.6%. This marks the second time it has led all categories since Q4 2024 and its third consecutive quarterly increase.

Income/Employment fell from the top spot for only the second time since Q4 2024, declining 21% to 21.5%.

For calendar year 2025, Borrower/Mortgage Eligibility climbed 291.5% year over year, and Credit rose 166.1%, reflecting a migration toward eligibility-driven defects as borrowers stretched to qualify in a constrained affordability environment.

Refinance review share nearly doubled year over year in calendar year 2025, rising from 11.1% to 21.0%, while refinance defect share more than doubled from 15.3% to 32.2%.

By loan product type, FHA defect share remained elevated relative to review share at 30.8% for calendar year 2025, and VA defect share rose for the second consecutive quarter in Q4, warranting continued segment-specific QC focus.

Nick Volpe, executive vice president at ACES Quality Management, said lenders ended 2025 on a strong note, with Q4 delivering a “meaningful drop” in the critical defect rate and the full-year average holding essentially flat versus 2024. “But the year’s defining shift toward eligibility-driven defects as refinance activity returned indicates that disciplined documentation and consistent eligibility decisioning will define quality in 2026,” he noted.