Critical Defect Rate Rises To 1.58%, Per ACES Mortgage QC Industry Trends Report
ACES Quality Management® (ACES), a provider of enterprise quality management and control software for the financial services industry, announced the release of its quarterly ACES Mortgage QC Industry Trends Report covering the first quarter (Q1) of 2024. The latest report analyzes post-closing quality control data derived from ACES Quality Management & Control® software. Notable findings from the Q1 2024 report include the following:
- The overall critical defect rate increased 3.27% to 1.58% in Q1 2024, ending five quarters of decline.
- While Income/Employment remains the leading category of defects, performance improved tremendously quarter-over-quarter in this category.
- Defects increased in two of the four major underwriting categories, with Credit defects nearly doubling from Q4 2023.
- Legal/Regulatory/Compliance defects increased by 208.37% to 16.22%, becoming the second-highest category of defects this quarter, followed by Loan Documentation at 14.41%.
- Insurance defects, while usually negligible, comprised 8.11% of all defects.
- Although refinance review share declined this quarter, defect share doubled, indicating a degradation in quality in this area.
- Defect share outstripped review share for conventional loans this quarter, most certainly fueled by the surge in refinance defects.
- Both review share and defect share declined in the FHA category. Lenders also saw substantial improvements in VA defect share despite significantly increasing review share over Q4.
“Given origination levels in the first quarter of this year, the findings in this report showed greater changes than expected,” said ACES Executive Vice President Nick Volpe. “Historically, defect rates decrease when there is a decline in origination levels; however, that was not the case for Q1. Mortgage lenders are no strangers to market adversity. While the market is shifting, we hope this report will serve as a reminder to reinforce quality control across the board.”
Findings for the Q1 ACES Mortgage QC Industry Trends Report are based on post-closing quality control data derived from the ACES Quality Management and Control® benchmarking system and incorporate data from prior quarters and/or calendar years, where applicable. All reviews and defect data evaluated for the report were based on loan audits selected by lenders for full file reviews.
“The current mortgage market presents distinct challenges that lenders must navigate with precision. Although the critical defect rate remains low by historical standards, the increase in a quarter with record-low origination volumes is concerning. Notable rises across underwriting categories and unexpected insurance defects need closer scrutiny from lenders,” said Trevor Gauthier, CEO of ACES Quality Management. “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 crucial for mitigating risk and ensuring long-term stability.”
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