The overall credit risk ratio increased in the first quarter of 2024, ending five consecutive quarters of decline. But the increase itself was small and the share of bad loans now stands at 1.58%, according to a report released on Thursday by. ACES Quality Management.
The company’s Mortgage QC Industry Trends Report analyzes post-closing quality control data taken from its Quality Management and Control software suite. It sets volume-based information to show overall trends in sources. But the flavor factor in the data included means the report is not an “accurate mirror” of the overall market, the company explained.
Critical errors increased by 3.27% compared to the fourth quarter of 2023, the report said. Income and employment data remained the top category for errors, although performance in this area “improved significantly” each quarter.
Two of the four main underwriting categories posted an increase in defaults, and loan impairments “almost doubled” from the levels recorded in Q4 2023. But legal, regulatory and compliance errors saw a significant increase, doubling their share as they were found at 16.22% of all debts. They account for the second largest category of defaults in Q1 2024, followed by defaults on loan documents (14.41%).
Insurance defects are “generally ignored,” the report explains, and made up 8.11% of the total defect share in Q1 2024. The share of refinance reviews also decreased during this period, but the share of the defect in this area doubled, indicating a “decreasing rate in this area,” explained the results.
Both reviews and negative sharing of Federal Housing Administration (FHA) loan category decreased in the first three months of the year. Lenders also recorded a “significant improvement” in the default allocation US Department of Veterans Affairs loans, “despite increasing share revisions over Q4.”
The defaulted share exceeded the revised share of both conventional and non-agency loans in the first quarter, the report said, due to “increased refinance defaults.”
Nick Volpe, senior vice president of ACES Quality Management, said some of the changes recorded in the new report were unexpected.
“Given the initial levels in the first half of this year, the findings of this report showed greater changes than expected,” Volpe said in prepared remarks.
“Historically, disability rates go down when there is a drop in primary rates; However, that was not the case with Q1. Mortgage lenders are no strangers to a struggling market. While the market is changing, we hope this report will serve as a reminder to strengthen quality control everywhere.”
Lenders must continue to navigate the mortgage market with an emphasis on accuracy, according to company CEO Trevor Gauthier.
“While the rate of significant disability remains low by historical standards, the increase in the quarter with the lowest rate of origin is concerning,” Gauthier said. “Notices are increasing across all categories of enrollees and unexpected insurance errors need to be closely monitored by lenders.
“Overall, the data clearly shows that lenders are under increasing pressure to maintain quality amid market volatility. A rapid approach to quality control is essential to reduce risk and ensure long-term stability.”
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