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ARMCO Report: Underwriting and Eligibility Defects Rise Despite Uptick in Quality

NationalMortgageProfessional.com
Sep 16, 2019
Photo credit: Getty Images/BrianAJackson

ACES Risk Management (ARMCO) has announced the release of the quarterly ARMCO Mortgage QC Trends Report, covering the first quarter (Q1) 2019, finding that the critical defect rate fell six percent, from 1.93 percent in Q4 2018 to 1.82 percent in Q1 2019.
 
“Q1 2019 revealed the loan quality correction we anticipated after Q4 2018, but while there are many positives related to the overall market’s upturn, we saw an increase in defects related to key underwriting and eligibility functions,” said Nick Volpe, chief strategy officer for ARMCO. “This continues a trend that persisted the entirety of 2018. Lenders shouldn’t take this lightly.”
 
The report’s noteworthy findings include:
 
►Defects related to core underwriting and eligibility functions continued to increase, with more defects attributed to Income/Employment than any other category.
►Critical defects attributed to missing, expired and/or incorrect documentation continued to be volatile (24 percent in Q3 2018, 16 percent in Q4 2018, and 24 percent in Q1 2019) and noted a substantial increase from the prior quarter.
►Compliance-related critical defects fell to their lowest level since Q1 2016, likely the result of greater lender investment in compliance technologies.
►Defects related to Property and Appraisal increased noticeably from the previous quarter but remained low overall.
►Government-insured loans accounted for a slightly higher share of all loans in the benchmark with FHA, VA and USDA loans comprising 41 percent of all loans reviewed.
 
The Q1 2019 ARMCO Mortgage QC Industry Trends Report is based on nationwide post-closing quality control loan data from over 90,000 unique 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.
 
“Refi-dominant markets can have a positive impact on defect rates,” said Phil McCall, president of ARMCO. “But when volume goes up, individual workloads increase, turn times extend and mistakes tend to increase. Lenders who leverage technology wisely scale much better and expose themselves to fewer losses as a result.”

 
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