Loan Defect Reports Show Mixed Quality
Reports from ACES Risk Management, Pompano Beach Fla., and First American Financial Corp., Santa Ana, Calif., offer mixed results on the state of mortgage loan defects.
ARMCO’s Mortgage QC Industry Trends Report noted a continuing downward trend in the critical defect rate, which dropped to 1.27 percent after reaching a high of 1.92 percent a year ago. This reflects a 28.3 percent drop from the third quarter, following a 17.8% drop in the second quarter, providing an overall drop of just over 46% from the high of 1.92% from the second quarter.
“During the past nine months, investors and lenders have been able to clarify the impact of TRID-related errors on their operations and fine-tune the associated risks–both short and long term,” said Phil McCall, COO of ARMCO.
The analysis of top-ranking defect categories for 2016 highlights Legal/Regulatory/Compliance as an ongoing leading problem area. Total defects associated with the Legal/Regulatory/Compliance category spiked by more than 14 percent in the quarter covered by the report. However, the critical defects within that same category dropped to a 12-month low, comprising 22.69 percent of all critical defects. Changes in lender severity ratings related to TRID are the cause of this decrease, as explained in detail in the report.
Comprising 32.5 percent of all reported defects, Loan Package Documentation comes in as the second highest defect category and is still an ongoing issue within the entire lending process. While this category is known to be problematic across the industry, these defects are generally curable and rarely affect loan salability.
Notably, critical defects associated with Income/Employment led all categories for “Credit Related Defects.” Miscalculation of income was the primary reason reported with critical defects in this category.
“While the industry as a whole is making progress in mitigating loan defects, there are still recurring trouble areas that must be addressed,” said Avi Naider, CEO of ARMCO. “At the same time, as we passed the one-year anniversary of the implementation date for TRID, it’s fascinating to see a complex picture emerging among our lender base: Essentially, TRID defects still represent a large percentage of overall defects. Yet, lenders are concluding that minor TRID defects do not impact the saleability of their loans based on their experience in the marketplace.”
The report can be accessed at http://www.armco.us/knowledge/mortgage-qc-industry-report-2016-q3?utm_source=LinkedIn&utm_medium=SocialMedia&utm_term=March2017&utm_campaign=Industry+Report_Q3+2016.
Meanwhile, First American last week reported an “acceleration” in defect, fraud and misrepresentation risk as the home market continues to shift to “riskier” purchase transactions.
For January, the First American Loan Application Defect Index highlighted the following:
–The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 5.8 percent in January from December.
–From a year ago, the Defect Index decreased by 3.9 percent.
–The Defect Index is down 28.4 percent from the high point of risk in October 2013.
–The Defect Index for refinance transactions increased 3.5 percent month-over-month, and is 9.2 percent lower than a year ago.
–The Defect Index for purchase transactions increased 2.5 percent compared to last month, and is down 1.2 percent compared to a year ago.
“The overall index increase is largely the result of waning refinance activity in the mortgage market,” said Mark Fleming, chief economist with First American. “Defect, misrepresentation and fraud risk is significantly lower on refinance transactions, so the increased risk of misrepresentation and fraud is due to the increasing share of higher risk purchase transactions within the mortgage market.”
Fleming noted while technology adoption has reduced risk for both purchase and refinance transactions, part of the overall decline in risk has been due to the recent dominance of refinance activity relative to purchase activity. “As the mortgage market composition continues to shift toward purchase transactions in 2017, the risk of defect, fraud and misrepresentation will also increase. In real estate, location matters. In defect, misrepresentation and fraud risk, loan purpose matters.”
Other report highlights:
–States with the greatest year-over-year increase in defect frequency were Wyoming (+32.2 percent), North Dakota (+29.0 percent), Montana (+27.3 percent), Mississippi (+25.4 percent) and Louisiana (+20.3 percent).
–States with the greatest year-over-year decrease in defect frequency were Michigan (-14.3 percent), Connecticut (-11.5 percent), California (-10.8 percent), Rhode Island (-10.1 percent) and South Carolina (-10.0 percent).
–Among the largest 50 metro areas, markets with greatest year-over-year increase in defect frequency were Raleigh, N.C. (+20.9 percent), St. Louis (+14.5 percent), Birmingham, Ala. (+7.4 percent), Minneapolis (+5.5 percent) and Jacksonville, Fla. (+4.7 percent).
–Markets with the greatest year-over-year decrease in defect frequency were Louisville/Jefferson, Ky. (-20.7 percent); Detroit (-20.0 percent); Oklahoma City (-17.4 percent); Sacramento, Calif. (-15.8 percent); and Miami (-15.3 percent).
