Lagging tech adoption and credit underwriting issues were likely contributors to loan quality worsening from a recent record-low rate, according to Aces Quality Management.
The
"The modest rate pullback during the quarter did not produce corresponding quality improvements in [quality control] outcomes," the report stated.
Income and employment defects were the most cited errors, rising over 42% from the fourth quarter and making up 23% of all issues. Documentation-related issues rose while calculation and eligibility-related defects waned, according to Aces. The report speculated that the shift may reflect lagging adoption of tools such as Freddie Mac's Loan Product Advisor Choice and Fannie Mae's self-employment income calculator.
Credit issues in underwriting also rose slightly and made up 12% of all critical defects in the first three months of the year. Documentation-related errors were again the culprit, as lenders may be struggling with missing or outdated credit reports, Aces said. The
"Those strategies may lower upfront costs, but can lead to downstream quality issues if they result in incomplete or inaccurate documentation in the final loan file," the report said.
Lenders today are
The defects from the first quarter were identified using Fannie Mae's defect taxonomy, or rather any aspect that makes a loan uninsurable or ineligible for sale. The errors don't necessarily represent instances of fraud, and a separate second quarter analysis found the
Lender improvement in other underwriting areas
Originators also struggled to contain eligibility errors, which quadrupled from the end of 2024 to account for nearly 7% of all defects, Aces reported. Those issues regarded calculations of debt-to-income and loan-to-value ratios and determining product eligibility.
Other underwriting fields however saw improvements, according to the study. Those include:
- Assets, making up a smaller 11.49% of critical defects because of broader adoption of automated verification methods;
- Legal, regulatory and compliance, accounting for 14.94% of errors as lenders corrected defects from past quarters;
- Appraisal, falling to 2.30% of all defects because of stability in valuation practices.
How defects shifted for different products and purposes
Only loans backed by the U.S. Department of Agriculture recorded a declining defect rate, despite an increase in volume. Errors in Federal Housing Administration-backed mortgages remained relatively flat, Aces said, while issues in conventional and Department of Veterans Affairs-backed loans ticked up.
The share of defects in purchase loans fell to start the year, despite an increase in volume.
"The resulting time pressure may have contributed to an uptick in defects, particularly in documentation-heavy areas," the report said.
