What’s Impacting Post-Close Loan Defects?

Published January 03, 2019

MReport by Radhika Ojha | January 3, 2019

Critical defects attributed to Borrower and Mortgage Eligibility increased by 70 percent to 11.36 percent in the second quarter of 2018, according to the latest Mortgage QC Industry Trends Report by Aces Risk Management(ARMCO).

The report represents an analysis of post-closing quality control data derived from loan files analyzed by the ACES Analytics benchmarking system, during the second quarter of 2018 (Q2 2018). It revealed that critical defects were most frequently related to core underwriting and eligibility issues, a trend that has been seen since the first quarter of 2017.

Q2 was also the second consecutive quarter to see a significant increase (23.8 percent) in the number of defects related to loan package documentation. On the other hand, the critical defect rate remained relatively steady at 1.71 percent compared to the first quarter of 2018.

According to ARMCO, a critical defect is defined as a defect that would result in the loan being uninsurable or ineligible for sale. The critical defect rate reflects the percentage of loans reviewed for which at least one critical defect was identified during the post-closing quality control review and all reported defects are net defects.

Looking at the distribution of critical defects across loan transaction types, the report found a higher percentage of these defects in purchase transactions compared to refinances. "This finding aligns with the assertion that purchase originations are typically more intricate and complex than refinance transactions and therefore present a greater risk of critical defects," the ARMCO report stated.

The top three defect categories were income/employment, loan package documentation, and assets, which accounted for 22.73 percent, 19.89 percent, and 17.61 percent of all critical defects respectively. The report cited that the increase in defects in loan package documentation were often associated with understaffing and downsizing by the lender.

When broken down by loan type, conventional loans accounted for 54.91 percent of all loans reviewed, FHA loans accounted for 33.10 percent, VA loans comprised 8.25 percent of the total, and USDA loans accounted for 3.75 percent.

Click here for the full report.

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