Mortgage loan defect rate improves in 2Q

While mortgage applications submitted during the first quarter had fewer critical defects compared with the prior quarter and year, issues with employment and income verification remain a problem, according to Aces Quality Management.

The critical defect rate in the first quarter was 1.93%, a decline of 2 basis points from the fourth quarter’s 1.95% and 8 bps lower than 2.01% in the first quarter of 2021.

Critical defects are an indicator, although not a definitive sign, for mortgage fraud.

Ironically, fewer defects was a benefit of the decline in mortgage application activity resulting from rising interest rates. But at the same time, as lenders look to boost originations through promotions, it is exacerbating other issues, particularly around income and employment.

“Lenders are finding this area a difficult one to rectify, and with staffing changes and new products coming online, it is more important than ever that QC managers get granular findings and feedback to their production group,” said Aces executive vice president Nick Volpe in a press release. “Additionally, as lenders expand the credit box to win the fight for volume, they must be careful not to stretch too far and further exacerbate defects in this category.”

Aces uses the Fannie Mae mortgage defect taxonomy to categorize its findings from performing post-closing reviews.

In the first quarter, income and employment issues made up 34.27% of all defects, compared with 26.63% in the fourth quarter and 31.44% one year ago.

In addition, among the other three categories that Aces considers to be “core,” asset-related defects was the only one whose share declined on a quarter-to-quarter basis, to 11.89% from 16.08%.

Credit rose to 11.89% from 9.05% during the same time frame, while defects attributed to liabilities increased to 12.59% from 10.05%.

But even with the increase in those three core categories, it was not all “doom and gloom” when it came to the overall critical defect picture, Volpe said.

“Out of the 11 primary loan defect categories Aces tracks, five showed considerable improvement over last quarter, and none more so than the documentation category, which dropped 37% from 14.57% to 9.09,” he said.

Separately, one of every 131, or 0.76%, mortgage loan applications submitted in the second quarter had indicators of mortgage fraud, a CoreLogic report found.

This compared with one in every 120, or 0.83%, applications submitted one year prior.

The CoreLogic Mortgage Application Fraud Risk Index was lower at the end of the second quarter compared with one year prior. However, part of the decline was attributed to CoreLogic recalibrating its scoring model in the first quarter.

Because purchase loans now predominate in the market, risks of income and property fraud posted the largest year-over-year increases in the second quarter, up 27.3% and 22.6% respectively.

“Income fraud risk remains a top concern for lenders, but there is a rising focus on property value risk as home prices slow their growth and homes are taking longer to sell,” said Bridget Berg, CoreLogic principal, Industry & Fraud Solutions, in a press release.

Identity fraud risk increased 4.7% year-over-year, while transaction fraud risk rose 1.6% and occupancy fraud risk rose just 0.8%. On the other hand, fraud risk related to undisclosed real estate debt fell by 12%.