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Mortgage QC Industry Trends — Q1 2025

“This quarter’s uptick in the defect rate reflects the ongoing challenges lenders face in today’s environment: tight timelines, elevated rates, and evolving borrower profiles. Still, we’re seeing progress in key areas, especially where lenders are leveraging automation and strong QC practices.”

- Nick Volpe, Executive Vice President of ACES Quality Management

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ACES’ Mortgage QC Industry Trends Report represents an analysis of nationwide quality control findings based on data derived from the ACES Quality Management & Control Software.

Executive Summary
QC Industry Trends – Overview
QC Industry Trends – by Category
QC Industry Trends – by Loan Purpose
QC Industry Trends – by Loan Product Type
Economic Discussion
Conclusion
About this Report


Executive Summary

This report represents an analysis of post-closing quality control (QC) data derived from loan files analyzed by the ACES Quality Management and Control® benchmarking system during the first quarter of 2025 (Q1 2025). The report incorporates data from prior quarters, where applicable.

Findings for the Q1 2025 Trends Report were based on quality control data from tens of thousands of unique records. Volumes are essential to this analysis, and the included records reflect trends in overall origination volumes. However, data from additional lenders is added to this analysis once the lender’s QC review seasoning within the ACES software reaches the 12-month bar. Therefore, the overall volume in the QC Trends Report does not precisely mirror the overall market and changes from quarter-to-quarter. All reviews and defect data evaluated for this report were based on post-close loan audits selected by lenders for full file reviews.

Defects are categorized using the Fannie Mae loan defect taxonomy. Data analysis for any given quarter does not begin until 90 days after the end of the quarter to allow lenders to complete the post-closing quality control cycle, resulting in a delay between the end of the quarter and our publication of the data.

NOTE: 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. All reported defects are net defects.

Summary of Findings

The overall critical defect rate rose to 1.31%, marking a 12.93% increase over Q4 2024’s historical low of 1.16% and ending a two-quarter streak of improvement. While the rise is not cause for alarm, it does signal a slight dip in loan quality following several quarters of steady gains.

Three of the four major underwriting categories saw increased defects this quarter, with Income/Employment reclaiming its spot as the leading category of defects. Borrower and Mortgage Eligibility saw a sharp increase, with defect share more than quadrupling over Q4, while Credit also experienced a moderate rise. Meanwhile, Assets, Legal/Regulatory/ Compliance, and Appraisal categories saw significant improvement. Loan documentation defects continued to decrease, building on gains made in Q4.

Refinance defect share rose this quarter despite a slight drop in review volume, while purchase defect share declined modestly even as purchase review share increased. These shifts may reflect lenders’ continued prioritization of purchase activity and a lag in quality control related to refinance transactions.

From a loan type perspective, FHA defect share remained relatively flat, while VA loans experienced a modest increase in defects despite a stable review share. Conventional loans continued to dominate review and defect share overall, both increasing slightly in Q1. USDA loans, however, saw a substantial improvement, with defect share falling by more than two-thirds even as review volume increased.

Highlights include the following findings:

The overall critical defect rate for Q1 2025 rose to 1.31%, up from a record low of 1.16% in Q4 2024, an increase of 12.93%. This uptick interrupts two consecutive quarters of declining defect rates and, while still below the informal 2% threshold, signals a potential shift in borrower risk and lender execution standards.

Industry-wide, mortgage originations in Q1 2025 totaled approximately 1.4 million loans, representing a 14% decline from Q4 2024, though still up 9.4% year-over-year from Q1 20241. The drop in volume largely reflects a notable 20% decline in purchase loans and a 12% shrinkage in refinance originations compared to the prior quarter.

Interest rates remained elevated throughout Q1. The 30-year fixed mortgage rate steeply declined from nearly 7% in January to around 6.6% by March, offering modest relief but still hovering well above historic norms2. Even with these variations, rates stayed in the 6.6% to 6.9% range, levels that continue to exert pressure on affordability and underwriting thresholds.

Taken together, these data points paint a picture of a market under strain: origination volumes are dampened by high rates, and the modest rate pullback during the quarter did not produce corresponding quality improvements in QC outcomes.

1 https://www.attomdata.com/news/market-trends/mortgage-origination/q1-2025-loan-origination-report/
2 https://fred.stlouisfed.org/series/MORTGAGE30US

Critical Defect Rate by Quarter: Q2 2024 — Q1 2025

Figure 1 displays the percentage of loans with critical defects by quarter for Q2 2024 through Q1 2025.

After reaching a record-low defect rate in Q4 2024, Q1 2025 brought a reversal in momentum, with several underwriting categories showing signs of renewed stress. Among the four core underwriting areas—Assets, Credit, Income/Employment, and Liabilities—two saw increases, one improved, and one held steady. Overall, underwriting-related issues once again represented a significant portion of the industry’s post-closing defect activity.

Income/Employment defects increased significantly in Q1, rising 42.5% from the prior quarter to account for 22.99% of all critical defects, returning this category to the top spot. Sub-category analysis shows that the increase was driven primarily by documentation- related issues, while calculation and eligibility-related defects declined. This shift may point to a growing divide between lenders using manual versus automated verification methods. Those still relying on manual processes may be more prone to documentation oversights, particularly in a low-volume environment where staffing and process variability can impact loan quality.

This comes on the heels of a year-over-year decline in Income/Employment defects reported in Q4 2024, which was attributed in part to the growing use of GSE-issued digital tools and programs, such as Fannie Mae’s single-source validation and self-employed income calculator and Freddie Mac’s LPA Choice and AIM tools. Given the sub-category trends and the broader context, the Q1 increase may reflect lagging adoption of these innovations. Lenders using automated solutions appear to be improving in areas like income calculation and eligibility validation, while those relying on manual documentation may be introducing new risk. Going forward, continued adoption and refinement of automated verification tools will be essential to reversing the upward trend in this category.

Credit defects rose moderately in Q1, increasing 11.96% quarter-over-quarter to account for 12.64% of all critical defects. Sub-category analysis shows that this increase was driven entirely by a rise in documentation-related errors, while eligibility-related defects declined. This shift suggests that lenders may be struggling with issues such as missing or outdated credit reports, incomplete mortgage payment histories, or other supporting documentation deficiencies.

One potential contributor is the continued increase in the cost of credit reports, which may be prompting some lenders to reduce the number of pulls per file or rely on less robust reporting options. While these strategies may lower upfront costs, they can lead to downstream quality issues if they result in incomplete or inaccurate documentation in the final loan file.

Liabilities held largely steady, slipping slightly from 12.90% in Q4 to 12.64% in Q1. While not a primary area of concern this quarter, this category remains important to monitor, particularly as borrowers stretch their budgets and debt-to-income ratios near threshold levels.

Assets was the only underwriting category to improve this quarter, with defect share falling from 16.13% to 11.49%, a 28.8% decline. Sub-category data shows that the improvement was driven primarily by decreases in calculation/analysis and eligibility errors, while documentation-related issues increased. These improvements mirror those observed in Income/Employment and may reflect broader adoption of automated verification methods that reduce manual error and support multi-dimensional validation.

Outside of the core underwriting categories, Borrower and Mortgage Eligibility defects more than quadrupled quarter-over-quarter, rising from 1.61% to 6.90%. This sharp increase indicates growing issues in accurately applying loan program guidelines, calculating LTV and DTI ratios, or properly determining product eligibility. As affordability remains strained and guidelines shift, this category bears watching.

One of the more notable improvements this quarter came from the Legal/Regulatory/Compliance category, which declined 33.8% from 22.58% in Q4 to 14.94% in Q1. This category is historically volatile, and it's not uncommon to see improvements in the quarter following a spike, as lenders identify and correct the root cause of errors identified in the prior quarter.

Appraisal defects also declined significantly, falling more than half from 4.84% to 2.30%, continuing a trend of stability in valuation practices. Meanwhile, Insurance defects rose modestly from 3.23% to 3.45%. Though still a small share of overall defects, this category remains volatile. As insurers adjust risk models and premiums in response to natural disaster losses and regional exposure, lenders must remain vigilant in validating policy coverage and insurability.

In total, Q1 2025’s category-level data reflects renewed pressure on core underwriting functions, particularly those requiring judgment-based analysis or alignment with evolving borrower profiles. At the same time, gains in compliance, asset documentation, and appraisal quality indicate that lenders are successfully refining processes in key areas of risk.

Critical Defects by Fannie Mae Category: Q1 2025

Figure 2 displays the dispersion of critical defects across Fannie Mae categories for Q1 2025. Please note that totals shown may not add up to 100%, as categories with negligible defects have been omitted.

Critical Defects by Fannie Mae Category: Q4 2024 vs. Q1 2025

Figure 3 displays the critical defect rate by Fannie Mae category, comparing Q4 2024 to Q1 2025.

Critical Defects by Fannie Mae Underwriting Sub-category: Q1 2025

Figure 4 displays sub-category information for Q1 2025 within the Assets, Credit, and Income/Employment categories.

Critical Defects by Fannie Mae Underwriting Sub-category: Q4 2024 vs. Q1 2025

Figure 5 displays sub-category information within the Assets, Credit, and Income/Employment categories, comparing Q4 2024 to Q1 2025.

Loan purpose trends in Q1 2025 reflect a continuation of the purchase-dominant market environment, with purchase review share increasing slightly to 87.60%, up from 86.31% in Q4. Refinance review share declined accordingly, falling to 12.40% versus 13.69% the previous quarter.

However, defect distribution tells a different story. While purchase loans accounted for the majority of files reviewed, purchase defect share decreased slightly, from 82.80% to 80.43%, suggesting some modest quality improvement in that segment. In contrast, refinance defect share increased notably, rising from 17.20% to 19.57% and representing a 13.78% increase quarter-over-quarter.

This disconnect between volume and defect share may reflect the pressure to close refinance loans originated in late 2024 before borrowers’ rate locks expired. In these cases, repricing at Q1’s higher rates could have jeopardized the transaction, prompting lenders to push loans through quickly. The resulting time pressure may have contributed to an uptick in defects, particularly in documentation-heavy areas.

These trends reinforce the importance of maintaining quality oversight regardless of loan purpose or urgency. Even as refinance volume remains low, loans that do close may carry elevated risk if rushed through the pipeline.

Defects by Loan Purpose: Q1 2025

Figure 6 displays the loans reviewed and critical defects by loan purpose for Q1 2025.

Loan type distribution in Q1 2025 remained largely consistent with the prior quarter. Conventional loans continued to dominate, representing 65.28% of loans reviewed and 65.96% of reported defects. These figures are nearly identical to Q4, reflecting continued stability in this segment.

FHA loans saw a modest increase in review share, rising from 21.40% to 21.92%, while their defect share decreased slightly from 25.81% to 25.53%. This minor improvement suggests that lenders are maintaining consistent quality in FHA originations, despite their heightened complexity and documentation requirements.

VA loans remained relatively flat in terms of review share, ticking up slightly to 10.49%, but defect share rose from 6.45% to 7.45%. While not a dramatic increase, it signals a need to monitor risk in this product type, especially considering VA loans' unique eligibility requirements.

USDA loans experienced a modest increase in review share, rising from 2.07% to 2.31%, while defect share dropped sharply, from 3.23% to 1.06%. This improvement represents one of the strongest quarter-over-quarter gains by loan type, suggesting enhanced underwriting execution or quality control performance in this category. As USDA lending volumes remain relatively low, continued attention to QC consistency will be important to sustaining these gains.

Overall, the relative stability across loan types suggests that quality control efforts are holding steady. However, the slight increase in VA defects—paired with volume shifts among government-insured products—reinforces the need for product-specific QC strategies to address unique guideline interpretations and documentation expectations.

Defects by Loan Product Type: Q1 2025

Figure 7 displays the loans reviewed and critical defects by loan type for Q1 2025.

Economic Discussion

Mortgage origination volume in Q1 2025 increased year-over-year but fell short of Q4 2024 levels, following seasonal expectations. Rates remained elevated throughout the quarter. The 30-year fixed rate peaked at 7.04% in mid-January, then gradually declined and stabilized in the mid‑6% range by March. This occurred despite three Federal Reserve rate cuts in late 2024, an unusual divergence attributed to broader market instability.

The primary disruptor was not monetary policy, but speculation during the run up to the major tariff announcement that ultimately occurred on April 2nd. During this run up, the market was reacting to rapid escalation and reversal of U.S. trade tariffs, which dominated much of the financial news cycle throughout Q1. Just hours after taking office in January, President Trump announced steep new tariffs on imports from Canada, Mexico, China, and Colombia, many of which were implemented, paused, or renegotiated within days. For example:

These policy swings created broad volatility across bond markets, muddling traditional indicators like Treasury yields and mortgage-backed securities pricing. For lenders, this translated into an unpredictable rate environment, even as Fed policy signaled moderation.

Looking forward, the unpredictable pace of tariff announcements, reversals, and retaliations could prolong market volatility, suppress lender confidence, and delay meaningful improvements in borrower affordability. In this environment, pipeline management, rate lock timing, and operational consistency become more critical than ever for preserving loan quality.

3 https://www.nytimes.com/2025/03/13/business/economy/trump-tariff-timeline.html

Conclusion

Following two quarters of improvement, Q1 2025 marked a reversal in the trend, with the critical defect rate rising from a historic low of 1.16% in Q4 2024 to 1.31%. While this increase does not signal immediate alarm, it underscores the importance of continued vigilance, particularly given the broader economic and policy uncertainty that shaped the first quarter.

Three of the four major underwriting categories saw elevated defect rates, with Income/ Employment reclaiming the top spot and Credit continuing its upward trend. Notably, Borrower and Mortgage Eligibility defects more than quadrupled, suggesting increased strain in aligning borrower qualifications with product guidelines. However, the overall landscape also showed signs of resilience, as categories like Assets, Legal/Regulatory/ Compliance, and Appraisal improved meaningfully.

Purchase volume continued to dominate, and while defect share in that segment declined slightly, refinance defects increased despite lower review share, thus highlighting the lingering risk embedded in pipelines formed under shifting market conditions. By loan type, Conventional loans remained stable, FHA performance improved modestly, VA defect share rose, and USDA maintained gains from the prior quarter.

All of this unfolded against the backdrop of a volatile economic quarter marked by elevated mortgage rates and aggressive changes in U.S. trade policy. The disconnect between monetary policy and market rates served as a reminder that external forces like tariffs and global supply dynamics can create unexpected headwinds for lenders.

As the industry looks ahead to Q2 and beyond, the key takeaway from Q1 is clear: automation alone won’t eliminate risk, but it can help contain it. Lenders who adopt digital verification tools and maintain strong QC oversight, especially in documentation- heavy categories, will be best positioned to adapt to continued economic and operational uncertainty.

About the ACES Mortgage QC Industry Trends Report

The ACES Mortgage QC Industry Trends Report represents a nationwide post-closing quality control analysis using data and findings derived from mortgage lenders utilizing the ACES Analytics® benchmarking software.

This report provides an in-depth analysis of residential mortgage critical defects as reported during post-closing quality control audits. Data presented comprises net critical defects and is categorized in accordance with the Fannie Mae loan defect taxonomy.

About ACES

ACES Quality Management is the leading provider of enterprise quality management and control software for the financial services industry. The nation’s most prominent lenders, servicers and financial institutions rely on ACES Quality Management & Control® Software to improve audit throughput and quality while controlling costs, including:

Unlike other quality control platforms, only ACES delivers Flexible Audit Technology, which gives independent mortgage lenders and financial institutions the ability to easily manage and customize ACES to meet their business needs without having to rely on IT or other outside resources. Using a customer-centric approach, ACES clients get responsive support and access to our experts to maximize their investment.

For more information, visit www.acesquality.com or call 1-800-858-1598.

Media Contact: Lindsey Neal | DepthPR for ACES | (404) 549-9282 | lindsey@depthpr.com

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