Mortgage application critical defects were back on the rise in 2Q

Mortgage application critical defects were back on the rise in 2Q
Written by Publishing Team

Critical flaws in a first-time mortgage application increased in three quarters, with errors in the income and employment category at the highest since Aces Quality Management began this report in 2016.

The critical defect rate in the second quarter rose 13% over the first quarter to 2.27%. In the first quarter, the rate was 2.01%, while in the first quarter The second quarter of last year, was 1.88%.

“Several factors contributed to the critical imbalance rate, including the transition from the refinancing market to the market buy market, previous quarter landing margins, evacuation Uncertainty about the moratorium and rises inflationNick Volpi, Aces Executive Vice President, said in a press release. As the market continues to shift to purchase transactions primarily, lenders should expect continued volatility over the next few quarters and, therefore, keep a close eye on flaws for the foreseeable future.”

Defects are not evidence that someone has committed fraud in order to obtain a mortgage, but are red flags that indicate the loan should be examined. Moreover, defects can lead to a request to buy back a loan from an investor in the secondary market.

Problems with the applicant’s income and employment accounted for 32.08% of all defects, compared to 31.44%. in the first quarter. Due to the pandemic, income and employment defects jumped to 30.19% in the second quarter of 2020, before correcting to 20.98% in the third quarter of last year and 23.77% in the fourth.

The next most cited defect category, loan documents, accounted for just 12.5% ​​of errors, up 13 basis points from the first quarter.

Legal and regulatory compliance flaws increased 155 basis points from the first quarter, to 10.83%. “We expect the share of defect in these manufacturing-related categories to remain stable or improve in future quarters as volume pressures make the loan creation process more predictable overall,” the Aces report said.

Borrower and mortgage deficiencies also registered 10.83%, down from 14.43% in the first quarter.

The share of asset-related defects also declined, falling to 10% from 12.37% qoq.

Credit defects fell to 7.5% from 12.89%. But valuation defects increased to 5.42% from 2.58%, due to the shift to the buying market. The report said lenders need to increase their risk management and quality control efforts in this area as a result.

Despite the high critical defect rate, the second quarter data revealed some positive trends, including the stabilization of mortgage origin volume and Low unemployment.

“These, along with other economic factors, provide some optimism for the coming quarters, although the potential impact of inflation on interest rates could dampen those expectations,” Aces CEO Trevor Gauthier said. “Given the uncertainty in the 2022 market and increasing regulatory pressures, lenders must ensure that their existing quality control and compliance programs take advantage of automation to maximize loan quality and mitigate risk.”


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