ARMCO: Critical Loan Defect Rates Increase for Third Consecutive Quarter

ACES Risk Management, Pompano Beach, Fla., released its Mortgage QC Trends Report for second quarter 2017, noting the critical defect rate increased for the third consecutive quarter.

The Trends report, based on loan quality findings for mortgages reviewed by ACES Audit Technology between April 1, 2017 and June 30, 2017, said the critical defect rate rose to 1.76 percent in Q2 2017, an increase of 9 percent over Q1 2017 (1.61 percent).

The top critical defect category for Q2 2017 was Borrower and Mortgage Eligibility. Purchase loans account for a disproportionately high number of critical defects, said Phil McCall, president of ARMCO.

“We’re seeing a continuation of critical defect activity that aligns with what we’d expect in a purchase-driven market,” McCall said. “If they haven’t already done so, lenders should consider how they’ll address these specific loan quality issues if purchases continue to dominate the market.”

The Report is based on nationwide post-closing quality control loan data from more than 90,000 loans selected for random full-file reviews, as was captured by the company’s ACES Analytics benchmarking software. Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.

“Investors are tracking these trends as well, and could make adjustments to protect themselves from what they see as potentially damaging market trends–lenders need to be aware of that,” said McCall. “Adjusting QC efforts in the short term can help lenders react to guideline changes with ease and fluidity.”

The report is available at