Defects decline as mortgage lenders self-correct

Critical defects fell to a rate of 2.01% in Q1 2021, down from an elevated rate of 2.34% in Q3 2020

Mortgage lenders have been making strides to right their wrongs, with critical defects falling to a rate of 2.01% in the first quarter of 2021, according to ACES Quality Management’s report published this week.

This marks a notable improvement from the third quarter of 2020, when the critical rate rose to 2.34%, buoyed by increased volume, COVID-19 related compliance changes, and continued high unemployment numbers, the analytics vendor said.

Nick Volpe, executive vice president of ACES, said that these results mark a “second consecutive quarter of decline in the critical defect rate.” The previous quarter saw the rate of critical defects drop to 2.09%.

“Lenders and servicers should still proceed with caution, as declines in gain-on-sale, the conclusion of the eviction moratorium, persistent inflation and a potential default wave as forbearances come to an end all have the potential to trigger industry disruption,” Volpe said.

Defect categories that need some attention from mortgage lenders, said ACES, is the income/employment category, as well as some of the core underwriting/ qualification categories.

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However, the good news is that the defect rate for regulatory compliance and loan documentation, which were both elevated categories for several quarters, have started to decline, showing that mortgage lenders “are self-correcting and stabilizing their operations,” ACES said.

Trevor Gauthier, CEO of ACES, said in a statement that the overall critical defect rate, but specifically in the “[Early Payment Defaults] and the regulatory compliance and loan documentation defect categories speak to an industry that has made considerable strides to course-correct after the tumultuous year.”

Gauthier warned that “2021 may not prove to be any less challenging, which places even greater emphasis on lenders’ defect tracking and reporting efforts to remain ahead of the curve and adjust their operations as necessary to stay on track.”

Other notable trends: the refi review share continues to be strong and defect performance has improved.

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