Q2 2025 mortgage defect rate increases to 1.51%

"The report noted that higher defect findings in collateral drove the increase, which was primarily driven by eligibility and regulatory-related categories. Although the overall critical defect rate increased for a second straight quarter, the situation is nuanced, said Nick Volpe, executive vice president at ACES Quality Management. The rise was mainly in specific categories such as appraisals and eligibility-related areas. Meanwhile, other key underwriting areas saw notable improvements."

"This mixed performance demonstrates the importance of continuous monitoring and targeted quality control efforts. Income and employment documentation remained the largest sources of critical defects, but they improved significantly, dropping compared to the previous quarter from 22.99% to 18.45% of all critical defects. Credit and liabilities defects also declined sharply. Assets represented the only underwriting category to increase, rising from 11.49% to 12.92% of all critical defects."

"Outside of underwriting, however, lenders saw a spike in collateral-related problems. Appraisal defects surged from 2.3% to 5.9% of all critical findings. Borrower and mortgage eligibility defects increased from 6.90% to 15.87%, and property-eligibility issues rose to 4.06% after none were reported in the first quarter. Purchase defect share decreased to 73.96%, while refinance defect share climbed to 26.04% amid increased cash-out activity."

Higher defect findings in collateral drove the increase, primarily in eligibility and regulatory-related categories. The overall critical defect rate rose for a second consecutive quarter, concentrated in appraisals and eligibility-related areas while several other underwriting areas improved. Income and employment documentation remained the largest sources of critical defects but declined from 22.99% to 18.45% of all critical defects; credit and liabilities defects also decreased sharply. Assets were the only underwriting category to increase, from 11.49% to 12.92%. Sub-category analysis showed calculation/analysis defects rose from 20% to 25.71% and eligibility defects from 0% to 5.71%, while documentation defects fell from 80% to 68.57%.

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