Critical defects found in post-closing reviews increased more than 15% in Q2 2025, according to ACES Quality Management, as issues with appraisals were up almost 157%.
Shifts in loan composition between purchase money mortgages and refinancings in the period contributed to higher findings, but the core underwriting qualities remained stable, ACES said.
“The rise was mainly in specific categories, such as appraisals and eligibility-related areas,” said ACES Executive Vice President Nick Volpe. “Other key underwriting areas saw notable improvements.”
The quarterly report found the increase in the overall defect rate was “modest,” but it also marked the second consecutive overall increase.
Despite this uptick, loan quality continued to improve across most categories, with three of the four core underwriting areas showing measurable gains, the report said.
ACES found that underwriting performance strengthened, reflecting more consistent documentation and verification practices. Assets was the only underwriting category to rise, though the increase was limited to calculation and eligibility components.
Outside of underwriting, appraisal, borrower/mortgage eligibility, property eligibility, and legal/regulatory/compliance defects increased, consistent with the shift toward more complex cash-out refinance activity. Loan documentation and insurance defects both declined, but remained volatile.
According to the report, appraisal defects surged 156.5%, while borrower/mortgage eligibility defects more than doubled to 15.87%.
At the same time, income/employment defects improved 19.7%, falling from 22.99% to 18.45% of all critical defects.
Documentation and insurance defects declined 32.6% and 25.2%, respectively, while the purchase share decreased to 73.96% and the refinance defect portion climbed to 26.04% amid increased cash-out activity.
Overall, according to ACES, conventional loan quality improved but FHA and VA quality rose, but just modestly.
