Critical defects on mortgage applications reached a new high in the third quarter last year, in a period when originations declined steeply and competition heightened, according to a new report from
Findings of material errors committed during underwriting increased for the third quarter in a row, hitting a 2.47% share, which represented a jump of over 40 basis points from 2.05% from the previous three months. In the first quarter, the rate came in at 1.93%.
"The overarching theme for this quarter's report is the effect of sharp declines in loan volume and interest rate volatility on lenders' operations," said Aces executive vice president Nick Volpe in a press release.
"With purchase originations down nearly 20% quarter over quarter and close to 50% year over year, lenders are fighting to keep every potential piece of business that comes their way and, perhaps, becoming more aggressive in their borrower qualifications."
While the effect of
"Operating that close to the edge leaves little room for error, thus making defects far more likely to occur," according to its quarterly industry trends report.
Three out of Aces' four core underwriting categories posted a higher percentage of critical errors compared to the previous quarter. Asset, credit and liabilities all saw increases to 15.07%, 11.87% and 6.85%, from 13.46%, 10.26% and 5.13%, respectively.
Income and employment related issues made up 24.66% of Aces' findings, down from 26.92% in the second quarter. Although the share decreased on a quarterly basis, potential trouble points emerged within subcomponents of the category, particularly when it came to eligibility, where the percentage of problem findings more than doubled.
Among the eight other categories, appraisal, insurance and loan documentation were the only three seeing improvement in their defect rate, falling to 2.74%, 0.91% and 13.7% of loan volume analyzed from 3.85%, 1.92% and 20.51%, respectively. The
Aces applies Fannie Mae's taxonomy to classify its data, which comes from post-closing reviews of transactions selected for audit by lenders. Analysis does not begin until at least 90 days after a quarter ends.
Government-sponsored mortgages accounted for 37.4% of loan volume, but made up 52.7% of the critical-defect number. While the share of loans with flaws that were backed by either the U.S. Department of Agriculture or Department of Veterans Affairs decreased on a quarterly basis, the portion of Federal Housing Administration-guaranteed mortgages grew by nearly threefold. With a complicated process behind the creation of FHA loans, industry layoffs among underwriting specialists in those types of mortgages would likely have "a material impact" on manufacturing errors, the report stated.
Meanwhile, conventional mortgages made up 47.3% of loans with significant issues, up from 44.7% in the second quarter.
Purchases equaled 81.8% of loans during Q3, with refinances comprising 18.2%. But underwriting issues reported among refinances exceeded its review percentage at 22.1%, likely attributable to the more complicated nature of third-quarter transactions in comparison to the lower-rate environments in prior periods.
"Borrowers opting for a refi in the current market were likely doing so for reasons other than simply locking in a lower rate," according to the report.
Aces began publishing its quarterly report in 2016, with the first edition covering originations dating back to the second quarter of the prior year.
