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Report Shows Falling Defect Levels

Rates drop BHACES Risk Management (ARMCO) announced the release of the ARMCO Mortgage QC Industry Trends report for Q3 2016 on Wednesday. The report, using the Fannie Mae loan defect taxonomy, gives insight into loan quality nationwide.

The report shows that the benchmark critical defect rate dropped 1.27 percent during the quarter, reflecting a downward trend in 2016 following a 1.92 percent high in Q1, and coming close to Q4 2016’s rate of 1.21 percent.

ARMCO's analysis showed that the legal/regulatory/compliance category and the loan package documentation category appear as problem areas, with defect rates of 38.9 percent and 32.5 percent in Q3 2016, respectively. Legal/regulatory/compliance defects rose 14.4 percent between Q2 2016 and Q3 2016.

Within the same category, critical defects dropped to a 12-month low, and comprised 22.69 percent of all critical defects, an improvement over Q1 2016 when the legal/regulatory/compliance category comprised 53.23 percent of all critical defects, though it remains the highest category. Loan package documentation, the second highest category, is a known and continuous problem across the industry, though it rarely affects loan saleability.

“The findings in the Q3 Mortgage QC Industry Trends report demonstrate that while the industry as a whole is making progress in mitigating loan defects, there are still recurring trouble areas that must be addressed,” said CEO of ARMCO Avi Naider. “At the same time, as we passed the one year anniversary of the implementation date for TRID, it’s fascinating to see a complex picture emerging among our lender base: Essentially, TRID defects still represent a large percentage of overall defects. Yet, lenders are concluding that minor TRID defects do not impact the saleability of their loans based on their experience in the marketplace.”

According to the report, Fannie Mae has guided lenders as to what causes defects and how defects are reported for credit related defects.

Read the full Q3 2016 report from ARMCO here.

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