ARMCO: Defect Trends Indicate Continued Lender Downsizing

ACES Risk Management, Pompano Beach, Fla., released its quarterly ARMCO Mortgage QC Trends Report, noting a significant quarter-over-quarter increase (23.8% over Q1 2018) in defects related to Loan Package Documentation, which it said is often associated with downsizing and understaffing, a trend that began earlier this year.

The report said the majority of defects were attributed to the Income/Employment category, a trend that began in the first quarter. Core underwriting and eligibility issues were the most frequent cause of critical defects, a trend that has continued since Q1 2017.

ACES reported the critical defect rate decreased slightly, from 1.72% in Q1 2018 to 1.71% in the second quarter. Defects attributed to Borrower and Mortgage Eligibility increased by 70%, from 6.57% in Q1 2018 to 11.36% in the second quarter.

“In Q2 2018, we saw continued increases in defects typically resulting from downsizing and understaffing,” said Phil McCall, president and COO of ARMCO. “This seems to indicate that many lenders are still responding to the reduction in business and compressed margins with personnel changes, even in a purchase-dominated market.”

McCall noted although defects associated with loan package documentation do not usually result in non-saleable loans, they can still have a detrimental impact on profitability. They often result in investors and insurers suspending loan purchases, which can reduce warehouse line capacity and result in price adjustments.

“The market’s current fluctuation demonstrates the financial reasons lenders need QC technologies that are dynamic and adaptable enough to respond quickly when the market shifts,” McCall said. “Sacrificing quality is a costly but unnecessary consequence of revenue reductions. In reality, no lender needs to accept less than the highest quality, regardless of contracting volumes or margins.”