The quality of loans is taking a hit, even though the number of new mortgages is declining
The overall critical defect rate for mortgages rose in the first quarter of 2024, ending five consecutive quarters of decline. But the increase itself was relatively modest and the share of defective loans now stands at 1.58%, according to a report released Thursday by ACES Quality Management.
The company’s Mortgage QC Industry Trends Report analyzes post-closing quality control data from its Quality Management & Control software platform. It contextualizes the information based on volume to show overall trends in originations. But a spice factor to the included data means the report is not an “accurate mirror” of the overall market, the company explained.
The number of critical defects increased by 3.27% compared to the fourth quarter of 2023, the report said. Income and employment data remained the top category for shortcomings, although performance in this area “improved tremendously” on a quarterly basis.
Two of the four major underwriting categories reported an increase in defects, and credit defects “nearly doubled” from levels in the fourth quarter of 2023. But legal, regulatory and compliance defects saw a sharp increase, more than doubling their share, as they were found in 16.22%. of all loans. They were responsible for the second largest category of defects in the first quarter of 2024, followed by defects in loan documentation (14.41%).
Insurance defects are “generally negligible,” the report explains, accounting for 8.11% of the total defect share in the first quarter of 2024. The refinancing share also fell over the period, but the defect share in this area doubled, indicating a “deterioration in quality in this area,” according to the results.
Both the review and defect shares for the Federal Housing Administration (FHA) loan category declined in the first three months of the year. Lenders also recorded “substantial improvements” in defect share The U.S. Department of Veterans Affairs loans, “despite significantly increasing assessment share in the fourth quarter.”
The defect share exceeded the appraisal share for both conventional and non-agency loans in the first quarter, which the report attributed to “the increase in refinancing defects.”
Nick Volpe, executive vice president of ACES Quality Management, said some of the changes recorded in the new report were unexpected.
“Given production levels in the first quarter of this year, the findings in this report showed larger changes than expected,” Volpe said in prepared remarks.
“Historically, defect rates decrease when there is a decline in production levels; however, that was not the case for the first quarter. Mortgage lenders are no strangers to market adversity. As the market is changing, we hope this report will serve as a reminder to strengthen quality control across the board.”
Lenders must continue to navigate the mortgage market with an emphasis on precision, according to CEO Trevor Gauthier.
“While the critical defect rate remains low by historical standards, the increase in a quarter of record low production volumes is concerning,” Gauthier said. “Notable increases in several underwriting categories and unexpected underwriting failures require closer scrutiny by lenders.
“Overall, the data clearly shows that lenders are under increasing pressure to maintain quality amid changing market dynamics. A proactive approach to quality control is critical to mitigating risk and ensuring long-term stability.”
