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.
About This Report
Summary of Quarterly Findings
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
About This Report
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 second quarter of 2025 (Q2 2025). The report incorporates data from prior quarters, where applicable.
Findings for the Q2 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. 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 Quarterly Findings
The overall critical defect rate increased to 1.51% in Q2 2025, a modest quarter-over-quarter rise and the second consecutive increase. Despite this uptick, loan quality continued to improve across most categories, with three of the four core underwriting areas showing measurable gains. The overall increase was primarily driven by higher findings in collateral, eligibility, and regulatory-related categories, which offset progress in other areas.
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.
By loan purpose, the quality of purchase loans improved even as refinance activity increased. The rise in refinance defects stemmed from the growing share of cash-out transactions, which carry greater complexity in terms of collateral and income analysis. Conventional loan quality improved after two quarters of deterioration, while FHA and VA findings rose modestly alongside expanding review share.
Overall, Q2 2025 results reflect a mortgage industry maintaining strong manufacturing quality amid shifting market conditions. The modest increase in the critical defect rate was driven by changes in loan composition rather than a systemic decline in lender performance.
Highlights include the following findings:
- The overall critical defect rate increased 15.27%, rising from 1.31% in Q1 2025 to 1.51% in Q2 2025, marking the second consecutive quarterly increase.
- Income/Employment defects decreased 19.7%, improving from 22.99% to 18.45% of all critical defects while still retaining the highest defect share across all categories.
- Assets increased 12.5%, rising from 11.49% to 12.92%, while Credit and Liabilities both decreased 38.7%, declining to 7.75% each.
- Appraisal defects increased 156.5%, rising from 2.30% to 5.90%.
- Borrower/Mortgage Eligibility defects more than doubled, increasing from 6.90% to 15.87%, while Property Eligibility rose to 4.06% after reporting none in Q1.
- Legal/Regulatory/Compliance defects rose 8.7%, from 14.94% to 16.24%.
- Loan Documentation defects declined 32.6% to 7.75%, and Insurance decreased 25.2% to 2.58%.
- Purchase defect share decreased from 80.43% to 73.96%, while refinance defect share increased from 19.57% to 26.04%.
- By loan type, Conventional defect share decreased to 59.62%, FHA increased to 30.22%, VA increased to 9.62%, and USDA decreased to 0.55%.
QC Industry Trends – Overview
The overall critical defect rate rose to 1.51% in Q2 2025, up from 1.31% in Q1 and marking the second consecutive quarterly increase. While still low by historical standards, this modest uptick signals a normalization of loan quality following the near-record improvements achieved in late 2024. The rise largely reflects changes in loan composition rather than systemic deterioration in manufacturing quality.
Mortgage market activity increased modestly during the quarter but remained well below pandemic-era peaks. Total loan originations rose 19.4% quarter over quarter, a gain attributed more to seasonal momentum and short-lived rate dips than to any broad-based housing recovery. Refinance lending accounted for most of the increase, up roughly 27% from Q1, as some homeowners took advantage of marginal rate improvements to reset loan terms or access home equity1. Purchase activity edged lower year-over-year despite the typical boost associated with the spring homebuying season, underscoring the continued drag of limited inventory, high home prices, and persistent affordability challenges.
The average 30-year fixed mortgage rate fluctuated between 6.62% and 6.89% throughout the quarter, trending slightly lower than the early-year highs of nearly 7%2. This modest relief was sufficient to spur limited refinance activity but not enough to meaningfully expand affordability for purchase borrowers. At the same time, homeowner equity continued to grow, with 47.4% of mortgaged properties considered equity-rich, while the share of seriously underwater properties declined to 2.7%3.
Together, these trends indicate a market exhibiting incremental progress rather than a full rebound. Loan quality results reflected that dynamic: generally strong performance overall, but with early signs of increased complexity in collateral and eligibility reviews tied to cash-out refinances and property valuation.
1 https://www.attomdata.com/news/market-trends/mortgage-origination/q2-2025-loan-origination-report/
2 https://fred.stlouisfed.org/series/MORTGAGE30US
3 https://www.attomdata.com/news/market-trends/home-sales-prices/q2-2025-home-equity-and-underwater-report/
Critical Defect Rate by Quarter: Q3 2024 — Q2 2025
Figure 1 displays the percentage of loans with critical defects by quarter for Q3 2024 through Q2 2025.
QC Trends by Defect Category
Despite an increase in the overall critical defect rate in Q2 2025, the quarter’s category-level results indicate generally positive performance across most of the dataset. The majority of categories improved over the prior quarter, including three of the four core underwriting categories. The overall increase in the critical defect rate stemmed primarily from higher findings within collateral, eligibility-, and regulatory-related categories, which outweighed gains made in other areas.
The most significant increases this quarter were concentrated outside of underwriting. Appraisal defects more than doubled, rising from 2.30% to 5.90% of all critical defects. Borrower/Mortgage Eligibility experienced a similar increase reaching 15.87%, and Property Eligibility increased to 4.06% after reporting zero defects in Q1. Legal/Regulatory/Compliance rose from 14.94% to 16.24%, reflecting a slight rebound following last quarter’s improvement. In contrast, Loan Documentation improved to 7.75%, while Insurance decreased to 2.58%, though both categories have remained volatile in recent quarters.
Within underwriting, performance strengthened across most areas. Income/Employment remained the largest single defect category but improved modestly, declining from 22.99% to 18.45% of all critical defects. Sub-category analysis reveals a reduction in Documentation-related findings (from 50% to 36%) and Eligibility (from 15% to 10%), while Calculation/Analysis increased (from 35% to 54%) as lenders continued to refine income-calculation processes. The improvement in overall share, combined with the shift toward calculation-focused findings, indicates continued progress in documentation completeness and consistency of verification.
Credit improved quarter-over-quarter, dropping from 12.64% to 7.75%. Sub-category data show a sharp decline in Documentation findings (from 81.82% to 51.14%) and a corresponding rise in Eligibility (from 18.18% to 48.86%), suggesting improved document integrity and a higher proportion of analytical or guideline-interpretation issues within remaining findings.
Liabilities also improved, declining from 12.64% to 7.75%. This category has remained relatively stable over the past year, and the reduction this quarter reflects consistent performance in debt capture and ratio validation.
Assets was the only underwriting category to increase, rising from 11.49% to 12.92% of all critical defects. Sub-category analysis shows increased findings in Calculation/Analysis (from 20% to 25.71%) and Eligibility (from 0% to 5.71%), while Documentation declined (from 80% to 68.57%). These results indicate that while lenders have made meaningful progress in document accuracy, analytical and eligibility checks remain areas for ongoing focus.
Overall, Q2 2025 results present a largely positive picture. The majority of categories, particularly the core underwriting areas, improved over the prior quarter, with increases concentrated in categories related to collateral, eligibility, and regulation. The sub-category trends indicate measurable progress in documentation accuracy and verification consistency, even as calculation and eligibility issues accounted for a larger share of the remaining findings.
Critical Defects by Fannie Mae Category: Q2 2025
Figure 2 displays the dispersion of critical defects across Fannie Mae categories for Q2 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: Q1 2025 V. Q2 2025
Figure 3 displays the critical defect rate by Fannie Mae category, comparing Q1 2025 to Q2 2025.
Critical Defects by Fannie Mae Underwriting Sub-category: Q2 2025
Figure 4 displays sub-category information for Q2 2025 within the Assets, Credit, and Income/Employment categories.
Critical Defects by Fannie Mae Underwriting Sub-category: Q1 2025 V. Q2 2025
Figure 5 displays sub-category information within the Assets, Credit, and Income/Employment categories, comparing Q1 2025 to Q2 2025.
QC Trends by Loan Purpose
Loan purpose trends in Q2 2025 reflected continued stability in purchase loan quality and a modest decline in refinance performance, as borrowers took advantage of slightly lower rates to access equity. Overall, the data indicates that the market is adjusting to an evolving loan mix rather than a broad deterioration in quality.
Purchase loans remained the majority of reviews, comprising 82.67% of post-closing audits, down from 87.6% in Q1 2025. Purchase defect share decreased to 73.96%, down from 80.43%, reinforcing the segment’s relative strength and consistency. The decline in defect share relative to review volume highlights continued discipline in underwriting and documentation practices, even amid affordability pressures and seasonal fluctuations in purchase activity.
Refinance loans accounted for 17.33% of the reviewed files, up from 12.4% in the previous quarter, while the refinance defect share increased to 26.04% from 19.57%. The rise in refinance defects corresponds with the growing prevalence of cash-out transactions, which typically involve more complex collateral valuations, equity calculations, and eligibility documentation. These dynamics mirror the increases observed in collateral, eligibility, and compliance-related categories at the overall dataset level.
In total, Q2 2025’s loan-purpose data depict a market balancing renewed refinance activity with steady purchase quality. The rise in refinance defects reflects increased loan complexity rather than a systemic decline in performance, underscoring lenders’ ability to manage quality effectively even as production volumes and loan composition evolve.
Defects by Loan Purpose: Q2 2025
Figure 6 displays the loans reviewed and critical defects by loan purpose for Q2 2025.
QC Trends by Loan Product Type
Loan-type performance in Q2 2025 reflected incremental improvement in overall quality, with conventional loans showing renewed strength after two quarters of deterioration and government-insured programs posting mixed results. Shifts across product types were moderate and largely in line with historical patterns.
Conventional loans comprised 61.04% of all reviews, down from 65.28% in Q1 2025, and represented 59.62% of all critical defects, compared with 65.96% the prior quarter. This quarter’s decline in both review and defect share marks a positive reversal following two consecutive quarters of increases.
FHA loans accounted for 25.76% of reviews (up from 21.92%) and 30.22% of defects (up from 25.53%), reversing two quarters of improvement. This increase corresponds with the program’s growing presence among borrowers facing tighter affordability conditions, as FHA lending tends to reflect broader market access rather than underwriting weakness.
VA loans represented 11.50% of reviews (up from 10.49%) and 9.62% of defects (up from 7.45%). This marks the second consecutive quarter of a higher VA defect share. However, the defect share remained below the review share, which is a positive indicator of stable quality within this segment.
USDA/RHS loans comprised 1.70% of reviews and 0.55% of defects, down from 2.31% and 1.06%, respectively, in Q1. This marks the second straight quarter of improvement for USDA lending, which continues to demonstrate strong quality relative to its size.
Overall, Q2 2025 loan-type results show broad stability across products, with improvements in conventional and USDA lending offset by modest increases in FHA and VA programs. The changes were narrow in scope and consistent with the shifting borrower mix tied to affordability constraints and rising government-insured participation. Loan quality across all product types remained strong by historical standards.
Defects by Loan Product Type: Q2 2025
Figure 7 displays the loans reviewed and critical defects by loan type for Q2 2025.
Economic Discussion
Following the volatility of early 2025, the U.S. economy regained traction in the second quarter as financial markets stabilized and trade-related uncertainty subsided. The tariff fluctuations that dominated Q1 gradually faded from headlines, and Treasury yields steadied as investors adjusted to the new policy environment. This normalization brought welcome predictability to the bond market, allowing mortgage rates to hold within a narrower range and lending activity to recover modestly. While the Federal Reserve maintained its policy stance through Q2, the absence of new trade shocks and the rebalancing of global supply chains provided a firmer foundation for economic growth.
The U.S. economy expanded at a stronger pace in Q2 2025, signaling a return to stability after the turbulence that defined the start of the year. Real gross domestic product (GDP) grew at an annualized rate of 3.8%, reversing the prior quarter’s contraction and marking the strongest growth since 2021. Consumer spending remained the primary driver, while a steep decline in imports added to the expansion. Employment conditions improved, with 449,000 jobs added and unemployment easing to 4.1%, underscoring the resilience of the labor market. Inflation continued to moderate, with the core personal consumption expenditures (PCE) index remaining near 2.5%, providing the Federal Reserve with room to maintain its current policy stance.
The Federal Reserve Board kept its benchmark rate unchanged throughout the quarter following three cuts in late 2024. Policymakers signaled patience as inflation and employment trended toward balance, allowing long-term yields and credit spreads to stabilize. As noted earlier in this report, mortgage rates stabilized within a narrower band during Q2, improving slightly from the broader and more volatile range observed in Q1. This modest rate relief reflected greater market stability and reduced uncertainty in pricing for Treasury and mortgage-backed securities. The shift helped lift refinance activity, particularly among homeowners accessing equity through cash-out refinances, but did little to ease affordability constraints for purchase borrowers.
Housing affordability remained a defining challenge. The national median existing-home price rose 1.7% year over year to $429,400, and three-quarters of metro areas reported price gains, though only 5% experienced double-digit increases4. Rising ownership costs continued to strain household budgets, with the typical home requiring roughly one-third of the average annual income—the highest share since 20075. Meanwhile, homeowners faced growing insurance burdens, with average premiums projected to rise 8% nationwide and some regions experiencing increases of more than 25%6.
These dynamics shaped both origination activity and loan quality during Q2. Modest rate relief and record levels of home equity fueled refinance applications, while high prices, insurance costs, and limited supply tempered purchase demand. Lenders adjusted effectively to the shifting mix, maintaining strong manufacturing quality even as the growing share of cash-out refinances introduced greater complexity in collateral and eligibility reviews.
Looking ahead to Q3 2025, the combination of strong employment, stable inflation, and cautious monetary policy suggests a continued environment of measured growth. While affordability and cost pressures will likely persist, the economic fundamentals in place at the end of Q2 indicate that lenders entered the second half of the year with a stable foundation to sustain loan quality performance amid evolving market conditions.
4 https://www.nar.realtor/newsroom/three-out-of-four-metro-areas-posted-home-price-increases-in-second-quarter-of-2025
5 https://www.attomdata.com/news/market-trends/home-sales-prices/q2-2025-home-affordability-report/
6 https://insurify.com/homeowners-insurance/report/home-insurance-price-projections/
Conclusion
Q2 2025 marked a period of transition for the mortgage industry, characterized by solid economic growth, modest rate stability, and a shift in loan composition that increased overall complexity. Although the critical defect rate rose slightly for the second consecutive quarter, the underlying data continued to reflect improvement in most areas of loan manufacturing. Three of the four core underwriting categories improved over the prior quarter, underscoring lenders’ sustained focus on documentation accuracy and process consistency.
As noted earlier in this report, modest rate stabilization and expanding homeowner equity spurred a resurgence in refinance activity, particularly in cash-out transactions. These loans carry greater collateral, valuation, and eligibility complexity, contributing to higher findings in those categories and in regulatory reviews. Meanwhile, purchase-loan quality improved despite affordability and insurance cost challenges, reflecting disciplined underwriting and borrower verification practices, even as home prices and ownership costs remained elevated.
Overall, Q2’s results illustrate a mortgage industry that continues to perform well within a complex and evolving market. The increase in the critical defect rate reflects shifts in loan mix rather than a systemic decline in quality, highlighting lenders’ capacity to maintain strong performance amid operational and economic change. With steady employment, moderating inflation, and a measured monetary policy setting the stage for the second half of the year, conditions entering Q3 2025 point to a stable quality environment, with continued attention warranted in collateral, eligibility, and compliance-related areas.
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:
- 70% of the top 20 independent mortgage lenders;
- 7 of the top 10 loan servicers;
- 11 of the top 30 banks; and
- 3 of the top 5 credit unions in the United States.
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. With ACES’ AI-powered capabilities, audit teams can translate complexity into clear insights and accelerate performance. 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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