Mortgage defects saw a dramatic decline in 2024

The national critical defect rate for mortgages fell to 1.16% in the fourth quarter of 2024. That marked the second-lowest level on record, according to a report released Thursday by ACES Quality Management.

For the entire calendar year of 2024, the average critical defect rate was 1.52%, down 9.52% from 2023.

Post-closing quality control data is collected through ACES’ quality management and control software and offers a snapshot of mortgage industry underwriting trends.

Key findings

• The Q4 2024 critical defect rate dropped 23.2% from the third quarter to reach 1.16%.
• Three of the four major underwriting categories — assets, income/employment, and credit — improved in Q4. But defects in the legal/regulatory/compliance and product eligibility categories increased.
• Legal/regulatory/compliance emerged as the leading defect category in Q4, followed closely by assets and income/employment.
• Income/employment and assets were the top defect categories for the year as a whole, followed by credit and legal/regulatory/compliance.

Within specific subcategories, the report noted declines in documentation and calculation/analysis issues in the income/employment category. Conversely, eligibility-related defects rose across multiple categories, including income/employment, assets and credit. Documentation-related issues also increased in the assets category.

On a transactional basis, the share of refinance reviews grew in Q4 2024 while purchase reviews declined. The defect rate for refinance transactions increased modestly, while purchase transaction defects decreased.

In terms of loan types:

• Federal Housing Administration (FHA) loan review share grew in Q4, with associated defect rates declining.
• Conventional review share held steady, although defects in that category rose slightly.
• U.S. Department of Veterans Affairs (VA) loan defect rates remained largely unchanged, while U.S. Department of Agriculture (USDA) volumes remained low.

Across the year, FHA and USDA loans saw declines in defect rates, while conventional loan defects edged up and VA loan rates remained flat.

“Lenders made meaningful progress in loan quality in 2024, closing the year with one of the lowest quarterly critical defect rates we’ve ever observed,” Nick Volpe, executive vice president at ACES, said in a statement.

“However, continued volatility across the Legal/Regulatory/Compliance and Insurance categories, as well as within the Income/Employment Eligibility subcategory, highlights the importance of ongoing diligence in quality control efforts.”

The findings are based on post-closing audit data submitted by lenders and analyzed through the ACES benchmarking system, incorporating historical data for context.