ARMCO QC Trends Report Shows Defect Uptick

ACES Risk Management, Pompano Beach, Fla., said its Critical Defect Rate rose in the third quarter of last year to its second-highest level since the TILA/RESPA Integrated Disclosure rule went into effect.

The company’s quarterly QC Trends Report said in 3Q 2018, the critical defect rate reached 1.89%, its second-highest rate since TRID went into effect, increasing nearly 11% from the previous quarter (1.71%).

The report said critical defects attributed to Loan Package Documentation spiked nearly 23% over the s econdquarter, making Q3 2018 the fourth consecutive quarter to see a significant increase in this category. Defects attributed to Income/Employment category dropped by nearly half, from 22.73% in the second quarter to 12.50%.

ARMCO said FHA loans accounted for a disproportionate number of critical defects, comprising 28.20% of originated loans in the benchmark, but accounting for 49.55% of loans with critical defects.

“You can tell a lot about a market from the percentage and distribution of critical defects,” said Phil McCall, president and COO of ARMCO. “In Q3 2018, defect activity indicates that lenders are still dealing with the quality issues that result from downsizing. We also see how lower volume markets can impact the quality of their loans.”

The Report also noted Credit and Liabilities each increased moderately, while the percentage of Property Appraisal-related defects reached its highest point of the year.

“This aligns with lower overall production and compressed margins, two key components of a hyper-competitive market,” McCall said. “In an effort to win market share, investors often become more aggressive by expanding eligibility guidelines, while originators try to make up for declining volume by submitting loans of lower than usual quality.”

“Analytics in quality control is vital in contracting markets,” McCall added. “Lenders that don’t use analytical technology will see more defects typical in lower volume, hyper-competitive markets, as well as the delays, fees, fines and even buybacks that can come with them.”

The report can be accessed at https://www.armco.us/learn/reports/q3-2018-armco-mortgage-qc-industry-trends.