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Mortgage QC Industry Trends — Q4 2024

“Lenders made meaningful progress in loan quality in 2024, closing the year with one of the lowest quarterly critical defect rates we’ve ever observed. However, continued volatility across the Legal/Regulatory/Compliance and Insurance categories, as well as within the Income/Employment Eligibility subcategory, highlights the importance of ongoing diligence in quality control efforts.”

- 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 fourth quarter of 2024 (Q4 2024) and the full calendar year 2024 (CY 2024). The report incorporates data from prior quarters, where applicable.

Findings for the Q4 2024 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 Findings

The overall critical defect rate for Q4 2024 dropped to 1.16%, the second lowest level recorded since ACES began publishing this report and a 23.18% improvement over Q3. Three of the four major underwriting categories saw double-digit declines in defects quarter-over-quarter, most notably in Income/Employment, which for the first time did not lead all categories. Credit also improved, while Legal/Regulatory/Compliance and Product Eligibility experienced defect increases.

Purchase review share declined in Q4, while refinance review share increased. Purchase defect share decreased, whereas refinance defect share rose slightly. Conventional and FHA review shares remained relatively flat, while USDA and VA review shares remained limited due to low volume. FHA defect share declined, while conventional defect share saw a modest uptick and VA remained unchanged.

For CY 2024, the overall critical defect rate averaged 1.57%, a 6.55% improvement from CY 2023. Of the four major underwriting categories, only Income/Employment and Assets improved year-over-year. Five of the nine defect categories tracked in the report showed increases compared to 2023. Refinance review and defect share both rose for the year, but review share outpaced defect share, indicating better performance. Purchase review share also increased, while defect share remained stable.

From a loan type perspective, FHA review share increased over 2023, while conventional and USDA review share declined. VA share remained unchanged. FHA and USDA both saw defect share improve compared to 2023. Defect share for conventional loans increased slightly, while VA defect share was flat year-over-year.

Highlights include the following findings:

The overall critical defect rate improved markedly in Q4 2024, declining 23.18% from the prior quarter to 1.16%—the second-lowest level recorded since the inception of this report. Following two consecutive quarters of elevated defects, this quarter’s result highlights lenders’ continued focus on quality amid persistent market pressures.

Compared to the prior year, the overall critical defect rate for calendar year 2024 averaged 1.52%, representing a 9.52% improvement over CY 2023. This downward trend reinforces the idea that lenders are prioritizing loan quality even as they navigate affordability constraints, shifting borrower profiles, and evolving regulatory expectations.

Mortgage rates, which remained above 6.5% for most of the year, reached their lowest point in the year in late Q3—bottoming out at 6.08% in late September—before steadily rising throughout October and November1. Rates did dip slightly in mid-December before ending the year at 6.85%.

However, the early period of sub-6.5% rates observed in October contributed to increased refinance activity and a modest lift in overall origination volume. In total, 2024 saw 5.1 million residential loans originated, representing a 7.5% increase in units and a 13.8% increase in dollar volume over the previous year—the first annual increase in origination activity since 2021. However, affordability challenges continued to weigh on purchase activity.

Collectively, these trends reflect a market still in recovery but showing signs of discipline. The sustained improvement in critical defect rates indicates that lenders are adapting well to current conditions. As the industry enters 2025, vigilance remains key to maintaining and building upon these gains.

1 https://fred.stlouisfed.org/series/MORTGAGE30US

Critical Defect Rate by Quarter: Q1 2024 — Q4 2024

Figure 1 displays the percentage of loans with critical defects by quarter for Q1 2024 through Q4 2024.

Critical Defect Rate by Calendar Year: 2023 — 2024

Figure 2 displays the percentage of loans with critical defects by quarter for each quarter in CY 2023 and CY 2024.

In Q4 2024, Legal/Regulatory/Compliance overtook Income/Employment as the leading defect category, marking the first time in over three years that Income/Employment did not hold the top spot. However, it is important to note that the Legal/Regulatory/Compliance category is historically volatile, and spikes of this nature are not unprecedented. In fact, Legal/Regulatory/Compliance led all defect categories for several consecutive quarters between Q3 2015 and Q2 2016, largely due to the implementation of TRID. More recently, however, Income/Employment has consistently ranked as the top defect category—especially from 2019 through early 2024—driven by the increased complexity in underwriting and employment verification brought on by the COVID-19 pandemic.

Because there is no clear evidence of a major policy change or regulatory shift that would warrant the current increase in Legal/Regulatory/Compliance, this spike is expected to be momentary. In fact, it is only due to the substantial improvement in Income/Employment defect share that Legal/Regulatory/Compliance rose to the top spot this quarter. Assets and Income/Employment followed closely behind in a tie for the second most-cited defect categories.

Compared to Q3, Legal/Regulatory/Compliance defect share rose 231.1%, from 6.82% to 22.58%. Income/Employment declined 35.5%, dropping from 25% to 16.13%. Credit and Assets also decreased, with Credit falling 6.9% and Assets by 3.2%. Liabilities, Project Eligibility, and Insurance were the only categories outside of Legal/Regulatory/Compliance to post quarter-over-quarter increases, rising 41.9%, 112.5% and 6.6%, respectively.

The Insurance defect category—historically below 1% of all defects—first spiked in Q1 2024 to 8.11%, and has remained elevated since. Following a brief dip in Q2, Insurance defects rose again in Q3 and continued their ascent in Q4. These increases are being driven largely by market volatility and rising hazard insurance premiums, particularly in disaster-prone regions where some insurers have significantly raised rates or exited markets altogether.

The Insurance defect category encompasses all levels of insurance on a loan, including hazard, flood, and mortgage insurance. Rising costs and coverage gaps have begun to impact loan qualification and closings, with borrowers’ debt-to-income ratios occasionally exceeding allowable thresholds once updated insurance premiums are factored in. These disruptions can lead to delayed or failed closings, placing additional pressure on both originators and borrowers.

Given the persistence of this trend, Insurance defects should no longer be viewed as outliers. QC teams must actively monitor this area to ensure borrowers have adequate coverage and that insurance data is accurately captured and updated throughout the loan file.

Among the “Big 4” underwriting categories, three—Income/Employment, Credit, and Assets—posted quarter-over-quarter improvement in Q4 2024. Liabilities was the only category to show a decline in performance. Income/Employment led the way with the most significant improvement, followed by Credit and Assets.

Sub-category analysis revealed that within Income/Employment, both Documentation and Calculation/Analysis-related defects declined from Q3. However, Eligibility-related defects rose not only in Income/Employment but also across Assets and Credit. The increase in Asset Documentation-related defects contributed to that category’s continued prominence, even as overall performance improved.

Within Income/Employment, the rise in Eligibility-related defects was particularly notable, accounting for 30% of all exceptions in the category versus just 6.06% in the prior quarter. Common issues included improper inclusion of income sources that do not meet underwriting requirements, such as less than two years on a new job, insufficient history of overtime pay, part-time or second job income, or non-guaranteed compensation like commissions and employer-provided reimbursements. As borrower income profiles grow more complex, accurate eligibility assessments remain critical to compliance and repurchase risk mitigation.

Despite these ongoing challenges, the overall Income/Employment defect share declined 9.79% year-over-year and fell from the top spot for the first time in over three years, which is an encouraging sign. This improvement may reflect lenders’ increasing adoption of GSE-issued digital verification tools and clearer underwriting guidance. In Q2 2024, Freddie Mac reported a 29.1% spike in repurchase activity linked to income verification errors, emphasizing the importance of addressing this area. In response, the GSEs have rolled out new capabilities—such as Fannie Mae’s single-source validation and self-employed income calculator, and Freddie Mac’s LPA Choice and AIM tools—all designed to reduce income-related defects and repurchase exposure.

Given the timing of these innovations, the decline in Income/Employment defects could represent the early impact of improved automation and validation processes. Continued adoption and refinement of these tools will be critical to maintaining this positive momentum into 2025.

Critical Defects by Fannie Mae Category: Q4 2024

Figure 3 displays the dispersion of critical defects across Fannie Mae categories for Q4 2024. 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: Q3 2024 vs. Q4 2024

Figure 4 displays the critical defect rate by Fannie Mae category, comparing Q3 2024 to Q4 2024.

Critical Defects by Fannie Mae Underwriting Sub-category: Q4 2024

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

Critical Defects by Fannie Mae Underwriting Sub-category: Q3 2024 vs. Q4 2024

Figure 6 displays sub-category information within the Assets, Credit, and Income/Employment categories, comparing Q3 2024 to Q4 2024.

Critical Defects by Fannie Mae: CY 2023 vs. 2024

Figure 7 displays the critical defect rate by Fannie Mae category, comparing CY 2023 to CY 2024.

In Q4 2024, purchase review share declined from 89.41% to 86.31% (a 3.47% decrease), while refinance review share increased from 10.59% to 13.69% (a 29.27% gain). However, defect share moved in the opposite direction: purchase defects fell 6.76%, while refinance defects spiked 53.57%. This pattern suggests that while lenders placed greater emphasis on refinance reviews, more focus may be needed to control quality in that growing segment.

Looking across CY 2024, purchase transactions comprised 88.86% of all reviews—up 4.20% from 2023—while refinance review share declined 24.32% year-over-year. Despite the drop in refinance volume, refinance defect share rose 5.44%, while purchase defect share improved slightly, down 0.92%. These results point to the importance of not only tracking volume trends but also maintaining adequate quality oversight regardless of transaction type.

While the market remains predominantly purchase-driven, refinance activity has begun to rebound. The disparity in defect performance between the two transaction types—particularly the significant uptick in refinance defects in Q4—signals the need for lenders to rebalance their quality control strategies in 2025.

Defects by Loan Purpose: Q4 2024

Figure 8 displays the loans reviewed and critical defects by loan purpose for Q4 2024.

Defects by Loan Purpose: CY 2024

Figure 9 displays the loans reviewed and critical defects by loan purpose for CY 2024.

Loan product trends in Q4 2024 revealed several shifts of note. Conventional review share rose 4.19% quarter-over-quarter to 66.12%, while FHA increased 11.87% to 21.4%. USDA review share also rose by 20.35%, while VA review share dropped significantly by 33.69% to 10.41%.

On the defect side, conventional loan defects rose sharply—up 25.01% from Q3 to Q4—while FHA defects declined 8.57%. VA defect share dropped significantly (down 65.23%), and USDA defects more than doubled (up 100.62%). These results highlight the variability across loan types and emphasize the importance of segment-specific QC strategies.

For CY 2024, conventional review share increased slightly from 61.7% to 62.39%, and VA share rose from 13.33% to 15.51%. FHA and USDA, on the other hand, saw review share decline 10.64% and 19.75%, respectively. From a defect standpoint, conventional loans posted a 21.86% year-over-year increase in defects, while FHA defect share declined 32.94%. USDA and VA defect shares rose 30.17% and 21.83%, respectively.

These results reflect stronger performance in FHA-backed loans and some deterioration in Conventional and government-backed segments like USDA and VA. As lenders navigate shifting product mixes in 2025, maintaining consistent loan quality across all product types will be key to avoiding repurchase risk and supporting investor confidence.

Defects by Loan Product Type: Q4 2024

Figure 10 displays the loans reviewed and critical defects by loan type for Q4 2024.

Defects by Loan Product Type: CY 2024

Figure 11 displays the loans reviewed and critical defects by loan type for CY 2024.

Economic Discussion

Q4 2024 concluded a year of gradual stabilization for the mortgage industry, marked by meaningful improvements in loan quality and lender profitability. While mortgage rates remained elevated by historical standards, the brief period of sub-6.5% rates observed in October likely drove much of the refinance activity, with the December dip providing a second opportunity for borrowers who had not yet acted—contributing to the overall increase in refinance volume observed in Q4.

Affordability also remained a key barrier. Elevated home prices, limited inventory, and rising insurance premiums continued to squeeze borrower budgets. In particular, borrowers in disaster-prone areas faced mounting challenges due to insurance availability and affordability. As noted in Q3’s discussion, homeowners in states like California, Texas and Florida—some of the nation’s largest origination markets—encountered escalating costs or outright coverage denials. These pressures pushed debt-to-income ratios beyond acceptable thresholds, directly impacting loan qualification and contributing to an ongoing rise in insurance-related defects.

While market demand remained constrained, profitability within the mortgage industry improved meaningfully over the course of the year. Independent mortgage bankers and mortgage subsidiaries of chartered banks posted net production profits in 2024 for the first time in three years2. These firms earned an average of $645 in net income on a per-loan basis, a sharp reversal from the $2,109 loss per loan in 2023. Key drivers of this turnaround included higher loan balances, lower production expenses, and improved secondary marketing gains, particularly during the refinance rebound in the second half of the year.

Servicing income also continued to act as a critical hedge, as lenders monetized portions of their mortgage servicing rights (MSRs) portfolios to improve liquidity and balance sheet health. The combined effect of operational streamlining, increased refinance activity, and stronger MSR valuations helped many lenders exit the year on firmer financial footing.

In parallel with these developments, the 2024 presidential election introduced a layer of uncertainty as the market assessed potential changes in regulatory oversight and GSE policy. While the election’s immediate impact on capital markets and mortgage rates was muted, lenders and QC professionals are closely watching for shifts in agency repurchase enforcement, appraisal policy, and loan eligibility rules. Any movement in these areas could influence lender risk appetite and loan manufacturing strategies in 2025.

As lenders enter the new year, they do so with improved footing, but structural headwinds persist. Continued investment in quality control frameworks, automation, and borrower-level risk analysis will be critical to sustaining performance and mitigating repurchase exposure in a still-evolving market landscape.

2 https://www.mba.org/news-and-research/newsroom/news/2025/04/17/independent-mortgage-bankers-post-net-production-profits-in-2024

Conclusion

Q4 2024 closed out the year with the second-lowest critical defect rate on record, driven by notable improvements in Income/Employment and Credit. Legal/Regulatory/Compliance led all categories for the first time since 2016, but its rise appears to be a temporary outlier resulting from the significant drop in Income/Employment defects.

Throughout 2024, lenders adapted to market shifts by increasing review volumes in refinance transactions and loan types like FHA and VA. While quality improved in areas such as FHA loans, defect rates rose in other areas, including refinance transactions and conventional loans. It is important to distinguish between transaction purpose and loan product types, as a loan’s purpose (purchase or refinance) can span any loan product category.

Persistent issues with insurance-related defects, growing repurchase risk tied to income eligibility, and the ongoing variability in rate and housing market dynamics suggest that QC teams must remain vigilant. With refinance volumes likely to grow and product complexity to evolve, maintaining consistency in loan manufacturing and leveraging automated tools will be essential to sustaining quality performance in 2025.

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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