Loan Defects on the Increase

ACES Risk Management, Pompano Beach, Fla., released its Mortgage QC Trends Report, showing the overall critical defect rate increased on a quarterly and yearly basis.

The report said the fourth quarter 2018 critical defect rate rose to 1.93 percent from 1.89 percent in the third quarter. For calendar year 2018, defects jumped from 1.68 percent to 1.81 percent.

ARMCO Chief Strategy Officer Nick Volpe said the increase in critical defects largely reflect rising interest rates and escalating property values. “Fewer highly qualified borrowers transact mortgages when rates increase, which fills the market with more marginal borrowers who tend to require more documentation,” he said. “It makes sense that defects related to loan package documentation more than doubled from 2017 to 2018.”

Other key findings:

–Defects related to income and employment rose. In the fourth quarter, income and employment-related defects increased by 63% from the third quarter; ARMCO noted income and employment-related defects comprised a greater percentage of total defects for both 2018 and 2017

–Defects attributed to Loan Package Documentation more than doubled between 2017 and 2018.

–Fourth quarter defects attributed to Underwriting/Eligibility continued to dominate overall quality issues, comprising over 65% of all critical defects.

–The top three categories that increased in the fourth quarter include Income and Employment, representing 20.39% of all critical defects in the benchmark, followed by Credit at 18.45% and Loan Package Documentation at 15.53%.

–For 2018, FHA loans accounted for 31% of the loans reviewed but represented 41% of loans containing critical defects.

“As the market fluctuates, so do the distribution and frequency of defects, and if lenders aren’t prepared, that can end up costing them a lot in price adjustments, fees, investor delays and even buybacks,” said Phil McCall, president of ARMCO.

The report is available at https://www.armco.us/learn/reports.