Critical mortgage defaults peaked in 2021

Last year was the worst on record for critical mortgage application defaults as pandemic-related stress on lenders’ operations in the first half of the year led to high rates of material misstatements, according to Aces Quality Management.

Meanwhile, the fourth quarter critical defect rate increased 4% from the prior three months due to the continued transition to a buying market more susceptible to potential fraud.

Slower mortgage origination activity helped contain a larger increase as lenders were able to stabilize workflow in their back offices, Aces continued.

For the full year, the critical defect rate was 2.01%, compared to 1.97% in 2020 and 1.71% for 2019, before the start of the pandemic. Aces started tracking this in 2016.

Findings of critical defects increased in the fourth quarter to 1.95%, compared to 1.87% for the third trimester and 2.09% during the fourth quarter of 2021.

“Given the surge in the fourth quarter and the ongoing issues we are still seeing in the income/employment category, lenders should focus their efforts on strengthening this component of their underwriting process,” the executive vice president said. of Aces, Nick Volpe, in a press. Release.

Mortgage fraud is more likely on a purchase request because the motivation is to get the buyer in a house.

Aces uses Fannie Mae’s Mortgage Default Taxonomy for its categorizations.

The fourth quarter indeed presented a lower income/employment mismatch rate than the third quarter, 26.63% against 33.16%, but it remained by far the first category.

Assets remained the second most common default, at 16.08%, 50 basis points lower than in the third quarter.

But defaults on loan documentation soared in the fourth quarter, to 14.57% from 7.49% in the previous three months. And over the same period, valuation defaults rose from 2.67% to 7.04%.

However, the expiration of state-level COVID-specific mortgage regulations likely drove the critical default rate down to 3.52% from 9.63% on a quarterly basis.

While the drop in volume has allowed lenders to focus on cases that have already arrived, the slowdown in business is likely to increase critical defaults in the future. They are starting to expand their credit box in order to maintain volume, Volpe said.

“As lenders battle for volume, quality control and compliance teams are more important than ever to ensure loans that come through the door meet all regulatory and eligibility requirements,” said added Aces CEO Trevor Gauthier. “On the origination side, we see the credit box expanding to help qualify more borrowers and maintain share.”

At the same time, federal and state regulators are tightening their control over mortgage managersthe industry must therefore remain diligent in its compliance practices, Gauthier warned.

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