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Critical Defect Rate for Mortgages Inches Up

Phil Hall
Sep 25, 2017

The critical defect rate for residential mortgages reached 1.61 percent during the first quarter, according to ACES Risk Management’s (ARMCO) latest Mortgage QC Trends Report. The first quarter figure was up from the 1.50 percent level in the previous quarter but down from 1.63 percent one year earlier.
The top defect category for the first quarter was Borrower and Mortgage Eligibility, which comprised 23.76 percent of all reported critical defects. This was followed by Income/Employment at 20.79 percent and Credit at 17.82 percent of all reported critical defects. Federal Housing Administration loans accounted for a disproportionately high number of critical defects, at 31.40 percent, followed by VA loans at 11.12 percent and USDA loans at 4.76 percent.
“The increase in the critical defect rate is the result of the purchase-dominated market we saw in the first quarter of this year,” said Phil McCall, president of ARMCO. “Purchase transactions bring a lot more moving parts, and a lot more opportunity for errors and misrepresentations. Whether that rate continues to rise will depend in large part on the ratio of purchases to refinances as we move forward.”
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