ACES releases a quarterly report that uses post-closing quality control data that’s derived from the company’s benchmarking system. The Q3 2024 report utilized reviews and defect data that were based on mortgage audits chosen by lenders for full file reviews.
Critical defects were found on 1.51% of all loans in the third quarter, a 17% decline from the defect rate of 1.81% in the second quarter.
“The drop in the overall critical defect rate this quarter is a welcome shift, but the underlying
trends tell a more complex story,” Nick Volpe, executive vice president for ACES Quality Management, said in a statement.
Income and employment was still the leading category for defects at 25%. It was followed by assets at 16.7%, while credit and loan documentation tied for the third most defects at 12.1% each. ACES also noted that income and employment was the only category in which performance improved.
“While it’s always heartening to see lenders making improvements in this area, the rise in defects in the Calculation/Analysis and Eligibility sub-categories — the latter of which has been non-existent for the last two quarters — is cause for concern,” the report stated.
Insurance defects increased “more than four-fold” in Q3 2024, growing from 0.65% to 3.03% of all errors, according to the report. ACES said this represents the volatility of the insurance defect pattern since the first quarter of 2024, when the insurance defect rate was 8%.
“The sharp rise in insurance defects, combined with fluctuations in key underwriting categories, reinforces the need for lenders to stay agile in their quality control efforts,” Volpe said.
Historically, insurance defects only cover a small portion of the overall quality control issues that ACES addresses in its report. These defects were often so negligible in volume that ACES has often excluded them from the report. In Q3 2024, however, weather-related natural disasters caused providers to raise insurance premiums.
Loan applicants also struggled as rising premiums made it difficult for them to qualify for mortgages due to higher debt-to-income ratios.
Conventional loans had the highest defect percentage in Q3 2024, accounting for 51.61% of critical defects. Federal Housing Administration (FHA) loans were next, posting a critical defect rate of 28.23%.
The economic impact of these critical defects imposes consequences for borrowers going forward. ACES recommends that lenders get better at balancing operational demands with compliance requirements to make sure loans remain well managed.
“This period reflects an industry balancing operational pressures with rigorous compliance demands, warranty regarding the information presented and assumes no responsibility for errors or omissions, underscoring the value of a robust QC program to identify and rectify areas of concern before they create a long-term impact on loan performance and lender profitability,” the report explained.
