The critical defect rate increased for the third consecutive quarter, reaching 1.76 percent in Q2 2017, an increase of nine percent over the Q1 2017 critical defect rate of 1.61 percent. The top critical defect category for Q2 2017 was Borrower and Mortgage Eligibility. Purchase loans account for a disproportionately high number of critical defects.
“We’re seeing a continuation of critical defect activity that aligns with what we’d expect in a purchase-driven market,” said Phil McCall, President of ARMCO. “If they haven’t already done so, lenders should consider how they’ll address these specific loan quality issues if purchases continue to dominate the market.”
The ARMCO Mortgage QC Industry Trends Report is based on nationwide post-closing quality control loan data from over 90,000 loans selected for random full-file reviews, as was captured by the company’s ACES Analytics benchmarking software. Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.
“Investors are tracking these trends as well, and could make adjustments to protect themselves from what they see as potentially damaging market trends—lenders need to be aware of that,” said McCall. “Adjusting QC efforts in the short term can help lenders react to guideline changes with ease and fluidity. We provide the ARMCO QC Trends Report free of charge so all lenders have the chance to adapt and elevate loan quality, and ultimately elevate overall loan quality for the entire industry.”