
Report Shows Critical Loan Defect Risk Increasing
ACES Risk Management, Pompano Beach, Fla., said loan defects increased in the first quarter as purchase mortgage market originations presented new challenges for lenders.
The company’s quarterly Mortgage QC Trends Report said the overall critical defect rate increased in the first quarter to 1.72 percent, up from 1.68 percent in the fourth quarter. ARMCO reported while the majority of critical defects were attributed to the Income/Employment category, the first quarter also saw a 25 percent increase in defects attributed to the Loan Package Documentation category, defects often associated with downsizing and understaffing.
The report also noted defects attributed to Borrower and Mortgage Eligibility dropped to 6.57 percent, half of the previous quarter’s rate of 12.24 percent.
ARMCO President Phil McCall said critical defects related to core underwriting and eligibility issues continued to be the most frequently occurring, typical of purchase-driven markets.
“The distribution of critical defects for the first quarter of this year differed significantly from those we saw during the last quarter of 2017,” McCall said. “What the report reveals is consistent purchase-dominant contracting markets. One of the newest trends is a spike in defects associated with loan package documentation. This is often a result of lender downsizing and staff consolidation, which occurs when declining loan volume becomes a trend-as it did in the beginning of this year.”
McCall noted defects associated with loan package documentation do not usually result in non-saleable loans. “However, they can still have a detrimental impact on profitability,” he said. “These types of errors often occur when staff members are rushed or unfamiliar with job tasks. Omitting a document required by an investor or insurer is a typical example. Errors like this can cause investors and insurers to suspend loan purchases, which reduces warehouse line capacity and can result in pricing adjustments, both of which significantly impair profitability.”
The Q1 2018 ARMCO Mortgage QC Industry Trends Report is based on nationwide post-closing quality control loan data from over 90,000 unique 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.
The report said leading critical defect categories for the first quarter were (1) Income/Employment, (2) Assets and (3) Loan Package Documentation. Purchase transactions continued to outpace refinances, comprising 62.98% of all transactions reviewed.
Earlier this month, First American Financial Corp., Irvine, Calif., reported frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased by 1.3 percent in August compared to July. From a year ago, the First American Loan Defect Index decreased by 8.3 percent.