Defects that would cause mortgages to be uninsurable decreased last year as the market shifted to traditional rate-and-term refinances.

The critical defect rate stood at 1.51% in the third quarter, down 30 basis points and marginally below the level at the end of 2023, according to Aces Quality Management in its quarterly underwriting report.

Last fall interest rates declined to 6.08% and there was a surge in rate refinancing. Interest rates have since increased.

During this window of falling rates, though, transactions were “far less complicated than other refinance scenarios,” Aces reported.

“Less complex transactions usually mean fewer errors so the drop in the overall critical defect rate this quarter makes sense,” stated the underwriting report.

The income/employment category had the largest share of problems in the third quarter, comprising 25% of defects, followed by assets, 16.7%; and credit and loan documentation categories, 12% each.

Insurance defects, which are normally negligible, remained elevated, comprising 3.03% of defects in the third quarter. 

Trends in insurance, including the rise of premiums in the wake of numerous natural disasters, are worth watching, Aces stated.  

The rising cost of insurance can “push borrowers’ debt-to-income ratios too high to qualify for the mortgage they seek,” the report noted. “Changes in insurance can also contribute to critical delays in closings.”