The evolution from a refinance to a purchase market has raised the risk of defects. Government-insured mortgages are more at risk than conventional loans.
In the first quarter of this year, mortgage originations had a critical defect rate of 1.61 percent. The rate reflects loans with at least one defect.
Defects are defined as a defect that would result in a residential loan being ineligible for sale to Fannie Mae.
Compared to the previous three-month period, the
loan-defect rate was elevated by 7 percent, continuing an upward trend.
ACES Risk Management reported the findings in the ARMCO Mortgage QC Trends Report for the first-quarter 2017. The report reflects post-closing QC data on more than 75,000 randomly selected loans from over 65 lenders.
The defect rate is measured after 90 days so that sufficient time has elapsed for
the post-closing QC cycle to be completed.
ARMCO President Phil McCall explained in an accompanying statement that the increase was the result of a shift to purchase financing, which is more complicated and prone to
errors and misrepresentations than refinance transactions.
The “Borrower and Mortgage Eligibility”
category was responsible for 24 percent of all first-quarter defects — the biggest share of nine categories. Among this group, 40 percent were associated with exclusionary lists and risk reports. Because more people are involved in a purchase transaction, there is a bigger chance one is on an exclusionary list than refinances.
At 21 percent, “Income/Employment” followed, then “Credit” at 18 percent.
While loans insured by the Federal Housing Administration made up 31 percent of loans reviewed, they accounted for 53 percent of loans with defects.
“The disproportionate share of critical defects among FHA loans represents a prime example of the need for analytics in business decision making,” the report stated. “Identifying the areas where defects are disproportionately high empowers lenders to conduct discretionary and/or targeted reviews. This in turn enables them to implement strategies that correct these issues by addressing the sources of the defects.”
On the flip side, conventional loans accounted for 53 percent of all loans reviewed but only made up 36 percent of loans with defects.
