Nationwide Loan-Quality Data for Early 2020 Released

ACES Quality Management (ACES), a provider of management software for the financial services industry, this week announced the release of the quarterly ACES Mortgage QC Trends Report. The latest report, which provides nationwide loan quality findings based on data from the proprietary ACES Quality Management and Control Software, covers the first quarter of this year.

A number of takeaways the researchers highlighted include:

• Overall critical defect rate of 1.56% matched the lowest rate in three years;
• Defects attributed to the credit and income categories rebounded after climbing higher in Q4 2019;
• Increases in the share of refinances (5%) and conventional loans (2%) contributed to the improvement in the overall defect rate; and
• Early payment defaults are on the rise.

ACES Executive Vice President Nick Volpe added to those that, “the combination of falling interest rates, employment numbers not yet impacted by COVID-19, and steady property appreciation all contributed to increases in the share of both refinances and conventional loans, which in turn drove the continued decrease in the overall critical defect rate observed in Q1, however, the last few weeks of the quarter encompassed the beginning of the COVID-19 pandemic, and given the economic impact of the pandemic on consumers, the number of early payment defaults increased, as one would expect.”

He went on to report that, “early Q2 data shows the number of EPDs reviewed by lenders through ACES is 75% higher than the average monthly rate of EPD reviews for 2019. Because an EPD review is triggered only when borrowers fall three or more payments behind, this indicates the industry is still in the early stages of the problem, and there is a high likelihood that the number of EPDs will continue to increase,” Volpe added.

The Q1 2020 ACES Mortgage QC Industry Trends Report is drawn from nationwide post-closing quality control loan data from more than 90,000 unique loans selected for random full-file reviews, as was captured by the company’s ACES Quality Management and Control benchmarking system. Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy.

“Amid the chaos and uncertainty driven by COVID-19, data provides a clear path forward for lenders. While the industry’s focus has been on managing the near-historic volumes, Q1 loan defect data also indicates that lenders must also turn their attention to the growing problem of EPDs, as this represents a significant operation and financial risk to their organizations,” said ACES CEO Trevor Gauthier.

Further summary broke down the following:

• The overall critical defect rate fell to 1.56% in Q1 2020, matching Q3 2019 and representing a multi-year low. The previous low was 1.53% in Q4 2016. The current quarter’s rate is 9.8% lower than the prior quarter’s rate of 1.73%.
• With the strong start to 2020, the market is taking advantage of the combination of falling interest rates, employment numbers not yet impacted by COVID-19, and steady property appreciation. All of these factors contributed to increases in the share of both refinances and conventional loans, which historically have lower manufacturing defects.
• Borrowers also saw an opportunity to draw cash from properties via cash-out refinances. Freddie Mac’s refinance datasets show that 42% of all refinances had loan amounts 5% or greater than the balance being refinanced.

The entire report can be accessed here.