ACES Risk Management (ARMCO), a provider of enterprise financial risk management solutions, announced the release of the quarterly ARMCO Mortgage QC Trends Report. The latest report covers both the fourth quarter (Q4) and the calendar year (CY) 2018, and provides loan quality findings for mortgages reviewed by ACES Audit Technology™.
“Critical defects in 2018 reflect the market’s rising interest rates and continued escalation of property values,” said Nick Volpe, chief strategy officer for ARMCO. “Fewer highly qualified borrowers transact mortgages when rates increase, which fills the market with more marginal borrowers who tend to require more documentation. It makes sense that defects related to loan package documentation more than doubled from 2017 to 2018.”
The report’s noteworthy findings include:
>>In Q4 2018, the critical defect rate increased just over 2%, reaching 1.93% fromthe previous quarters rate of1.89%
>>InCY2018,thecriticaldefectrateincreasedalmost8%overthepreviousyear,jumping from 1.68% in CY 2017 to 1.81% in CY2018
>>Defects related to Income and Employment are on therise: In Q4 2018, Income and Employment related defects increased 63% overQ3 2018; also in Q4 2018, Income and Employment related defects comprised agreater percentage of total defects for both CY 2018 and CY 2017
>>Defects attributed to Loan Package Documentation more than doubled betweenCY 2017 and CY2018.
>>InQ42018,defectsattributedtocategoriesrelatedtoUnderwriting/Eligibilitycontinued to dominate overall quality issues, comprising over 65% of all criticaldefects.
>>In Q4 2018, the top three categories that increased over Q3 2018 were all key qualification categories: Income and Employment, representing 20.39% of all critical defects in the benchmark. This category was followed by Credit at18.45% and Loan Package Documentation at 15.53%.
>> In CY 2018, FHA loans accounted for roughly 31% of the loans reviewedbut represented approximately 41% of loans containing criticaldefects.
The Q4/CY 2018 ARMCO Mortgage QC Industry Trends Report is based on nationwide post- closing quality control loan data from over 90,000 unique loans selected for random full-file reviews, as was captured by the company’s ACES Analytics benchmarking software. Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.
“As the market fluctuates, so do the distribution and frequency of defects, and if lenders aren’t prepared, that can end up costing them a lot in price adjustments, fees, investor delays and even buybacks,” said Phil McCall, president of ARMCO. “Analytical QC technologies enable lenders to catch the defects and proactively prevent them so they can protect their profits. In shifting markets, where defects are like moving targets, that’s more important than ever.”