The risk of defects in closed mortgages increased in the first quarter, and, interestingly, staff downsizing at mortgage companies could be partly to blame, ARMCO’s Mortgage QC Trends Report shows.
The “critical” defect rate for closed mortgages was 1.72%, up from 1.68% in the fourth quarter of 2017, according to the report.
As with the previous quarter, the majority of critical defects were attributed to errors in borrower-reported income and employment information.
In addition, the second quarter saw a 25% increase in the number of defects attributed to loan package documentation. These defects are often associated with downsizing and understaffing.
The number of defects attributed to the borrower and mortgage eligibility dropped to 6.57% – roughly 50% of the previous quarter’s rate of 12.24%.
Critical defects related to core underwriting and eligibility issues continued to be the most frequently occurring – which is typical in purchase-driven markets.
“The distribution of critical defects for the first quarter of this year differed significantly from those we saw during the last quarter of 2017,” says Phil McCall, president of ARMCO, in a release. “What the report reveals is consistent purchase-dominant contracting markets. One of the newest trends is a spike in defects associated with loan package documentation. This is often a result of lender downsizing and staff consolidation, which occurs when declining loan volume becomes a trend – as it did in the beginning of this year.”
Defects associated with loan package documentation do not usually result in non-saleable loans. However, they can still have a detrimental impact on profitability.
“These types of errors often occur when staff members are rushed or unfamiliar with job tasks. Omitting a document required by an investor or insurer is a typical example,” McCall says. “Errors like this can cause investors and insurers to suspend loan purchases, which reduces warehouse line capacity and can result in pricing adjustments, both of which significantly impair profitability.”
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