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The Impact of Lender Understaffing on Loan Quality

A report released by ACES Risk Management (ARMCO) details the quality of loans for mortgages audited by the firm, which provides financial risk management solutions for those in the housing industry. The report culls data gathered in Q1 2018 and compares it to data gleaned in the preceding quarter.

The report shows that in Q1 2018, the critical defect rate increased from the previous quarter, up to 1.72 percent from 1.68 percent in Q4 2017. Problems in income and employment continue to be the cause of the majority of these critical defects, as well as those stemming from core underwriting and eligibility problems—a phenomenon often associated with purchase-driven markets. Problems in borrower and mortgage eligibility dropped almost 50 percent, however, down to 6.57 percent from 12.24 percent in Q4 2017.

The major takeaway from the report is the number of critical defects resulting from erroneous or incomplete loan package documentation. These defects increased 25 percent from Q4 2017 to Q1 2018. Such defects do not commonly result in non-saleable loans, but they can and often do have a negative effect on profitability. Most often, defects in loan package documentation stem from staffing issues such as downsizing or an overworked staff, which reduces warehouse line capacity and leads to adjustments in price that can significantly impact the bottom line.  

“The distribution of critical defects for the first quarter of this year differed significantly from those we saw during the last quarter of 2017,” said Phil McCall, President of ARMCO. “What the report reveals is consistent purchase-dominant contracting markets. One of the newest trends is a spike in defects associated with loan package documentation. This is often a result of lender downsizing and staff consolidation, which occurs when declining loan volume becomes a trend—as it did in the beginning of this year.”

As for what sort of loan product types defaulted, nearly half (49.1 percent) were conventional. Another 39.66 percent originated with the Federal Housing Agency, another 10.34 percent with the Veterans Administration (VA) and just a fraction with the United States Department of Agriculture (0.86 percent).

ARMCO said that the report analyzed data for any given calendar quarter no earlier than 90 days after the end of the first quarter, allowing sufficient time for lenders to complete the post-closing quality control cycle. “Hence ARMCO releases analyses for Q12018 in Q32018.

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