The rate of critical defects within residential mortgages grew to 1.58% during the first quarter, an uptick that halted five straight quarters of decline, according to lending industry fintech ACES Quality Management.
The company performs a quarterly post-closing quality control study based on data derived from tens of thousands of records from its own benchmarking software. A critical defect, according to ACES, is one that would result in a loan being uninsurable or ineligible for sale.
The share of loans containing such defects remains a very modest one, and the increase to that share itself (a quarterly upswing of 3.27%) is slight. Defects, in fact, improved significantly in two of the four major underwriting categories defined by ACES. For one, while Income/Employment is still the leading category for defects, the defect rate in the category plunged from 36.8% in Q4 2023 to 23.4% in Q1 2024. That improvement was a welcome one, ACES noted, especially given an almost 60% increase in defect rate within the same category between the third and fourth quarters last year.
The defect rate in the Assets category, meanwhile, dropped from 17.3% in the last quarter of last year to only 11.7% in the first quarter of this year.
Those improvements, however, were offset by a stark increase in defects in the Credit category. Credit-related defects saw their rate jump from 4.5% to more than 9% quarter over quarter — a 99.8% vault.
The area of Legal/Regulatory/Compliance also saw an especially large increase in defects, with their rate rising from 5.3% in Q4 2023 to 16.2% in Q1 2024, marking a whopping 208.4% gain.
“Despite the modest increase in critical defects this quarter, the data shows lenders continue to progress in key underwriting areas. However, the significant rise in Credit and Legal/Regulatory/Compliance defects highlights the need for greater diligence,” said Nick Volpe, executive vice president of ACES Quality Management.
Volpe’s sentiments were echoed within the report, which noted that the increase in defects came during a low-volume period.
“Despite the increase, this quarter’s critical defect rate of 1.58% still ranks amongst the lowest rates observed throughout this report’s history,” the report said. “However, mortgage originations for Q1 2024 dropped 6.8% from the prior quarter, reaching the lowest level since 2000. Thus, to observe an increase during a record-low quarter for origination activity is troubling.”
“Maintaining quality is crucial in today’s challenging lending environment,” Volpe said. “Lenders must pay close attention to both regulatory shifts and market dynamics to ensure long-term stability.”
