Critical Defect Rate Drops in Q4 2022, ACES Finds

(Courtesy ACES)

ACES Quality Management, Denver, found the overall critical defect rate declined to 1.84% in Q4 2022.

“Anytime the overall defect rate is under 2% for the quarter or the year, that is something in which the industry should take pride,” the report noted. “Empirically speaking, 2% has become the informal marking stick where below is acceptable and above becomes worrisome. In the current repurchase environment, defects become infinitely more expensive.”

According to the ACES Mortgage QC Industry Trends Report, the overall defect rate for the year was 2.07%, up from 2021’s 1.97%. The full-year rate was pushed up by two quarters above 2%, including a report high in Q3.

For the quarter, the defect share for conventional and FHA loans rose, but USDA and VA loan performance improved.

“After last quarter’s historic high, the reduction in Q4’s critical defect rate to a sub-2% level is encouraging,” said Nick Volpe, Executive Vice President of ACES Quality Management. “However, aggressive GSE repurchase requests and lagging HUD reviews on vintage production may spell trouble for lenders that are already financially strapped due to declining volumes.”

Of the four major underwriting categories, credit improved significantly quarter-over-quarter, and liabilities improved as well. Assets and income/employment increased significantly, after multiple recent quarters of declines.

Other takeaways included:

• Income/employment remained the leading category for defects.

• Appraisal defects also increased in Q4, ending a trend of quarterly declines.

• Purchase share remained high in Q4, with the industry achieving defect parity for the quarter.

The report was based on an analysis of post-closing quality control data derived from loan files analyzed by the ACES Quality Management and Control benchmarking system during the fourth quarter of 2022 and the full calendar-year 2022. Defects were categorized using the Fannie Mae loan defect taxonomy.