ACES: Critical Defect Rate Rises From Annual Low in First Quarter

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ACES Quality Management, Denver, reported the overall critical defect rate increased to 1.71% in the first quarter from 1.38% in late 2025.

ACES latest Mortgage QC Industry Trends Report analyzes post-closing quality control data derived from the ACES Quality Management & Control software.

Nick Volpe, executive vice president of ACES Quality Management, noted the first quarter’s swing back above 1.7% is a reminder that mortgage quality doesn’t move in a straight line, “especially in a rate environment as volatile as this one.”

“The [interest rate] dip below 6% in February pulled a wave of refinance activity through lenders’ pipelines almost overnight, and this quarter’s data shows the eligibility and compliance friction that came with it,” Volpe said. “For lenders, success in 2026 will likely depend on their ability to flex their QC capacity as quickly as the rate environment is shifting in the current market.”

Other findings from the report include:

• Legal/Regulatory/Compliance defects increased from 24.66% to 26.02%. “It was the category’s fourth consecutive quarterly increase, its highest share since Q1 2021 and the second straight quarter as the leading defect category,” ACES said.

• Income/Employment defects declined 6.7%, easing from 21.52% to 20.07% and holding the No. 2 spot for a second consecutive quarter. It was the first time in the last five years that the category ranked second in back-to-back quarters.

• Asset defects dropped from 15.25% to 10.41%, the largest single-category improvement of the quarter.

• Credit defects eased from 5.38% to 5.2%, and liabilities defects were essentially unchanged, moving from 10.76% to 10.78%.

• Refinance review share rose from 27.37% to 32.05%, a fourth consecutive quarterly increase and the highest level since first-quarter 2022, while refinance defect share climbed from 36.84% to 38.57%.

• VA defect share fell 20.6%, from 12.32% to 9.78%, the strongest product-level result of the quarter. FHA defect share remained essentially flat, from 31.96% to 32.27%, continuing to run well above FHA’s 24.46% review share.