Mortgage market generates more defective loans for third consecutive quarter

But one expert said this increase was expected

The mortgage market is generating more defective loans for the third consecutive quarter, however, one expert claimed this increase is to be expected.

The critical defect rate increased for the third consecutive quarter, reaching 1.76% in the second quarter of 2017, according to the ARMCO Mortgage QC Trends report from ACES Risk Management. This is up 9% from 1.61% in the first quarter last year.

A critical defect is defined as a defect that would result in the loan being uninsurable or ineligible for sale. The critical defect rate comprises loans in which at least one critical defect was identified during the post-closing quality control review.

But one expert explained this increase is to be expected in a purchase market, and purchase loans accounted for a disproportionately high number of critical defects.

“We’re seeing a continuation of critical defect activity that aligns with what we’d expect in a purchase-driven market,” ARMCO President Phil McCall said. “If they haven’t already done so, lenders should consider how they’ll address these specific loan quality issues if purchases continue to dominate the market.”

Mortgage critical defects first spiked in the fourth quarter of 2016, when the implementation of the TILA-RESPA Integrated Disclosure rule caused the legal/regulatory/compliance and loan package documentation to become the leading defect categories in 2016.

The top critical defect category for the second quarter was borrower and mortgage eligibility in the second quarter of 2017, the report showed.

“Investors are tracking these trends as well, and could make adjustments to protect themselves from what they see as potentially damaging market trends lenders need to be aware of that,” McCall said. “Adjusting QC efforts in the short term can help lenders react to guideline changes with ease and fluidity.”

“We provide the ARMCO QC Trends Report free of charge so all lenders have the chance to adapt and elevate loan quality, and ultimately elevate overall loan quality for the entire industry,” he said.

The ARMCO Mortgage QC Industry Trends Report is based on nationwide post-closing quality control loan data from over 90,000 loans selected for random full-file reviews, as was captured by the company’s ACES Analytics benchmarking software. Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.

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