Critical Loan Defects Should Continue to Drop

Critical defects are down compared with Q1 of 2016, reports ACES Risk Management (ARMCO) in its Q4 Mortgage QC Industry Trends. The report details a breakdown of the final quarter of 2016, including defect rates and findings for each Fannie Mae loan category, and points to the implementation of TRID in October 2015 and the industry’s lack of understanding of its requirements as the main reason why critical defects and non-salable loans were on the rise.

TRID, or the Truth in Lending Act/Real Estate Settlement Procedure Act Integrated Disclosure, is a combination of the two previous aforementioned statutes designed to help ensure that borrowers know what they will owe and when it will be due. It also enhanced regulatory oversight, specifically in terms of closings.

ARMCO reports that critical defect rates were highest in Q1 of 2016 at 1.92 percent, and declined through Q2 and Q3 to 1.63 percent and 1.27 percent respectively. Q4 saw a small 18 percent increase to 1.50 percent.

The report also details the number of defects organized by Fannie Mae’s loan defect taxonomy. In Q4, Legal/Regulatory Compliance accounted for 39.89 percent of defective mortgages, while Loan Package Documentation came in second at 28.27 percent. Loan Package Documentation defects, however, did not necessarily result to non-salable mortgages, unlike many Legal/Regulatory Compliance defects. Income/Employment verification defects, the third leading cause of defect, only accounted for 7.58 percent.

Credit-only defects showed similar results with Loan Package Eligibility being the cause of defect 47.03 percent of the time, nearly more than all other categories combined. Income/Employment was at 12.6 percent, and Borrower and Mortgage Eligibility sat at 11.79 percent.

For Income/Employment: failure to obtain verification of employment was the top reason for defect at 60.75 percent. For Borrower and Mortgage Eligibility: 77.61 percent of reported defects were the result of annual household limits being exceeded.

ARMCO speculates that as industry professionals continue to gain a grasp of the implications of TRID and lenders are able to convey clearer instructions to borrowers, critical defects should continue to trend downwards.

Methodology:

The ACES Analytics benchmarking dataset includes post-closing quality control data from over 65 lenders, comprising more than 75,000 unique loans selected for random full-file reviews. Defects are categorized using the Fannie Mae loan defect taxonomy. Data for any given calendar quarter is analyzed approximately 90 days after the end of the quarter, to allow for sufficient elapsed time for the post-closing quality control cycle to be completed. As a result, data for the calendar year 2016 is published by ARMCO in Q2 2017.