ARMCO: Critical Defect Rates Continue Upward Trend

MIAMI–ACES Risk Management, Pompano Beach, Fla., said critical loan defect rates continued to increase in the first quarter.

The company’s quarterly Mortgage QC Trends Report said the critical defect rate rose to 1.61 percent, a 7 percent increase from the previous quarter. ARMCO reported the top defect category for the first quarter was Borrower and Mortgage Eligibility, although the report noted FHA loans accounted for a disproportionately high number of critical defects.

PhilMcCallHere at the MBA Risk Management, QA and Fraud Prevention Forum, ARMCO President Phil McCall said longer-term trends have moved away from compliance, such as with the TILA/RESPA Integrated Disclosure rule (TRID) and more toward the changing mortgage marketplace.

“The increase in the critical defect rate is the result of the purchase-dominated market we saw in the first quarter of this year,” McCall said. “Purchase transactions bring a lot more moving parts, and a lot more opportunity for errors and misrepresentations. Whether that rate continues to rise will depend in large part on the ratio of purchases to refinances as we move forward.”

McCall noted as lenders continue to relax underwriting criteria, critical defects are likely to increase in coming quarters, despite tougher underwriting standards in place since the financial crisis.

“It will be different–but it will be the same,” McCall said. “We will see some of the mistakes of the past, just done differently. Throw into the mix low housing inventories and high home prices and everyone is fighting for business. We’re going to see more fraud. We’re seeing more reports of fraud at this conference than we’ve seen in the past five years. The emerging purchase market is bringing that opportunity, and in some cases, we’re going to see blatant misrepresentations.”

The report is based on post-closing quality control loan data captured by the company’s ACES Analytics benchmarking software. The dataset includes post-closing quality control data from more than 65 lenders, comprising more than 75,000 unique loans selected for random full-file reviews. Defects are categorized using the Fannie Mae loan defect taxonomy.