Decline in Critical Defect Rate Falls to Under 2%

ACES Quality Management, a provider of enterprise quality management and control software services for the financial services industry, has released it’s 2022 year-end Mortgage QC Industry Trends Report which found overall that the critical defect rate at the end of the fourth quarter of 2022 declined 25.5% over the third quarter of 2022, ending the year at 1.84%. 

But as averages work, two consecutive quarters that had defect rates over 2% in 2022 meant that the average defect rate for the entire calendar year came out to be 2.07%. 

According to ACES, of the four major underwriting categories, credit improved considerably over the third quarter, while liabilities achieved a more modest improvement. Both assets and income & employment increased significantly, ending income & employment’s multi-quarter trend of decline. Income & employment remained the leading category of defects reported, with assets and borrower and mortgage eligibility completing the top three categories of defects cited. 

Appraisal defects also increased during the fourth quarter, ending another run of multi-quarter declines. Purchase share remained high during the quarter, with the industry achieving defect parity for the quarter. 

ACES further said that despite declining in terms of review share, FHA defects increased for the second consecutive quarter, as did conventional loans. USDA and VA loan defects continued to improve. 

“After last quarter’s historic high of 2.47%, the reduction in Q4’s critical defect rate to a sub-2% level is encouraging and illustrates just how much the precipitous drop in origination volumes impacted lending operations,” said ACES EVP Nick Volpe. “However, lenders are starting to see the GSEs take an aggressive stance on repurchase requests for loans with curable defects. In addition, HUD has yet to complete its reviews of some vintage FHA loan production, an area notorious for defects. All of this may spell trouble for lenders that are already financially strapped due to declining volumes.” 

“Loan defects are one of the greatest sources of financial risk to lenders in today’s tight origination market,” said ACES CEO Trevor Gauthier. “The best defense against this kind of threat is a robust QC auditing platform like ACES, which helps lenders retain the value of their loan production by identifying the point of origin for loan defects within the manufacturing process and uncovering defect trends to help resolve these issues before they become the impetus for a repurchase request or sale on the scratch-and-dent market.” 

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