Mortgage critical defects mark first 2017 decline in Q3

An increase in the share of refinances drove the first decline in mortgage critical defects in 2017 during the third quarter, according to the Mortgage QC Trends Report released by ACES Risk Management (ARMCO).

The critical defect rate slipped to 1.65% in the third quarter by 6% from 1.76% in the second quarter. The drop came as the percentage of purchase transactions also declined during the quarter. The report also found that purchase transactions and FHA loans accounted for a disproportionately higher number of critical defects during the quarter.

“As the percentage of refis increased in the third quarter of 2017, we saw a drop in critical defect rates. That said, purchases still comprise the majority of mortgages originated, so critical defect activity still aligns with what you’d see in a purchase-driven market,” ARMCO President Phil McCall said. “Lenders need to be mindful of the risks inherent with purchase transactions and take precautions, regardless of fluctuations in purchase/refi market share.”

Most of the reported net critical defects during the quarter were found to be related primarily to the underwriting process. This aligns with the trend recorded in the previous two quarters. The third-quarter report found that almost 60% of all critical defects were categorized as borrower and mortgage eligibility, credit, and income/employment defects.

Of the 60%, borrower and mortgage eligibility accounted for more than one third with 23% of all reported critical defects. Credit accounted for 22% of all reported critical defects, and employment/ income accounted for 14%.