ACES Quality Management’s quality control (QC) trends report for the second quarter of 2021 showed a 13 percent increase in the overall defect rate, ending a multi-quarter trend of improvement.
“Several factors contributed to the increase in the critical defect rate to 2.27 percent in Q2 of 2021, including the transition from a refinance market to a purchase market, the previous quarter’s falling margins, eviction moratorium uncertainty and rising inflation,” ACES Executive Vice President Nick Volpe said. “As the market continues to transition to primarily purchase transactions, lenders should expect continued volatility over the next few quarters and, therefore, keep a close watch on defects for the foreseeable future.”
Other observations in the report include:
- The continued dominance of the income/employment defect category, reaching its highest observed rate since the report started in 2016.
- Improvement in some of the core underwriting categories as well as in manufacturing-related categories, mostly likely driven by more predictable and stable volumes.
- A significant shift in reviews of refinance versus purchase transactions, further signaling the transition from a refinance market to a purchase one is well underway.
- Increased share and improved performance for conventional loans.
- A decline in early payment defaults, indicating reviews have peaked and are now below pre-pandemic levels.
“While the increase in the critical defect rate was disappointing, there are several silver linings to our Q2 findings, including volume stabilization and declining unemployment numbers,” ACES CEO Trevor Gauthier said. “These, combined with other economic factors, provide some optimism for the coming quarters, though the possible effect of inflation on interest rates may dampen that outlook.
“Given the uncertainty of 2022’s market and increasing regulatory pressures, lenders must ensure their existing QC and compliance programs are leveraging automation to maximize loan quality and mitigate risk.”