ACES: Q3 2024 Critical Defect Rate Falls

(Image courtesy of ACES Quality Management; Breakout image courtesy of Thirdman/pexels.com)

ACES Quality Management, Denver, released its Q3 Mortgage QC Trends Report, finding the overall critical defect rate declined from the second quarter by 17%. The overall rate ended the quarter at 1.51%.

One particularly notable spot, however, was the insurance defect rate. Such defects increased from .65% in Q2 to 3.03% of the share in Q3. Insurance defects were on a roller coaster in 2024; the Q1 rate stood at 8%.

Historically, insurance defects have been a tiny portion of the overall landscape, but have become more prevalent in recent quarters. ACES anticipates insurance defects will continue to be present amid record-setting losses from natural disasters.

“The drop in the overall critical defect rate this quarter is a welcome shift, but the underlying trends tell a more complex story. The sharp rise in insurance defects, combined with fluctuations in key underwriting categories, reinforces the need for lenders to stay agile in their quality control efforts,” said Nick Volpe, Executive Vice President of ACES Quality Management. “As market conditions evolve, leveraging technology and data-driven insights will be critical to maintaining loan integrity and mitigating future risk.”

Income/employment remained the leading category of defects at 25%. But, that’s an improvement from Q3, and it decreased by 32.45%.

Assets stood at 16.67%, and credit and loan documentation stood at 12.12% each. Loan documentation specifically saw a 43.6% increase from Q2.

Liabilities were nearly flat from Q2, at 9.09%.

Lenders generally increased their reviews of refinances, up by 19.39%, while the defect share declined in that category, by 32.81%.

The conventional review share increased in Q3, but critical defects fell to 51.61% in Q3 compared with 66.44% in Q2.

FHA loan critical defects increased to 28.23%. USDA loan defects decreased to 1.61% after a spike at 8.9% in Q2.

VA loans saw their highest share of critical defects since at least Q1 2021, from 2% in Q2 to 19% in Q3. However, ACES noted that the jump likely indicates a short-term uptick stemming from discrepancies in the income reverification letter.