ARMCO: Year over Year Trends Show ‘Marked Improvement’ in Critical Defect Rates

ACES Risk Management, Denver, released its quarterly ARMCO Mortgage QC Trends Report, showing critical defect rates improved from the fourth quarter to the first and in 2019 overall.

“Reduced interest rate volatility and declining interest rates over the course of the year created an environment in which lenders rode a sustained wave of refinances, increased their overall loan production and improved their profitability – all of which contributed to the improvements in loan quality in 2019,” said ARMCO Executive Vice President Nick Volpe. “With the rate environment expected to remain unchanged throughout 2020, the loan quality levels observed in 2019 seem sustainable.”

Volpe noted, however, the report does not and cannot account for the anomalies triggered by the COVID-19 pandemic. “Therefore, lenders will need to keep a sharp eye out for negative spikes in their loan data as 2020 continues,” he said.

Key findings:

  • On a quarter-over-quarter basis, critical defect rates improved in the first three quarters of 2019 before reversing the decline and climbing in Q4 2019.
  • Q4 2019 ended with a defect rate of 1.73%, an increase of 11% from Q3 2019.
  • The share of conventional loans increased from 56.40% in CY 2018 to 61.99%, representing a nearly 6% increase.
  • Purchase share fell 7.5% in CY 2019 as compared to CY 2018.
  • Regulatory compliance issues were down 51% year-over-year, to a multi-year low of 5.17% of all critical defects.
  • Loan Package/Documentation defects were volatile in CY 2019 but did post a 12% improvement compared with CY 2018.
  • Income, Assets, and Credit (key qualification/underwriting criteria) related defects made up 53% of all critical defects in CY 2019, with Income and Credit increasing from the prior year, and Asset defects decreasing.
  • Market stability contributed to an overall better 2019 for lending quality. However, these improvements will be severely tested as data comes in for the coming quarters as we start to see COVID’s impact on mortgage lending.

“While 2019’s critical defect rates represent a clear improvement over 2018 and suggest a continuation of that trend moving into 2020, the increase in forbearance requests, high unemployment rates and the potential for early payment defaults to spike later in the year will certainly put this prediction to the test,” said ARMCO CEO Trevor Gauthier.

Volpe will discuss findings from the report and offer insights into what lenders can expect in future quarters during a webinar; to access the webinar recording, visit