The mortgage loan critical file error rate in 2020 was the highest since Aces Quality Management started tracking this data in 2016.
Such issues, indicating errors in the manufacturing process, ranked second only to income and employment last year as sources of critical defects found in post-audit mortgage file reviews by Aces. Problems with credit documentation were found in 16.6% of the files examined, compared to just under 15% in 2019.
That surge was caused by pandemic-related difficulties and is overall symptomatic of manufacturing-related deficiencies, Aces said.
While the overall 2020 error rate was the highest ever at 1.97%, that number was below the fourth quarter's rate of 2.09%, an improvement over the 2.34% seen in the third quarter. The Aces executive team has been fairly positive about annual results, with for example the critical error rate of 1.73% in the fourth quarter of 2019 and 1.81% in 2018.
Credit deficiencies are a red flag of mortgage fraud, but not evidence of it.
"It would be easy to say that the last two quarters of 2020 have been grim, but given the pandemic, unemployment and critical defect rate, our fourth quarter results are positive," said Trevor Gauthier, CEO of Aces, in one Press release. "Critical error rates and early payment defaults will continue to be watched closely, especially as lenders respond to the changing landscape of 2021 and more borrowers come out of indulgence."
Mortgage lending broke records in 2020, and particularly in the last two quarters of the year, which can also contribute to problems with loan records.
According to Fannie Mae, around $ 4.5 trillion in mortgage volume was granted last year, of which $ 1.35 trillion in the third quarter and $ 1.34 trillion in the fourth quarter.
The error rate in credit documentation decreased quarter-to-quarter from 18.75% to 14.75% at the end of 2020, but remained the third largest category of critical shortcomings for the period after income and employment, and legal, regulation and compliance emissions generated in the Reporting period increased from 8.5% in the second quarter to 21.3% in the fourth quarter.
Aces uses the Fannie Mae credit error taxonomy to categorize its results.
"Amid a positive interest rate environment and an improving economy, the critical defect rate slowed in the fourth quarter," said Nick Volpe, executive vice president, in the report. "The marginal decrease in critical defects is the first step in what will hopefully be a downward trend."
The critical error rates on both an annual and quarterly basis were disappointing as they were higher than in the past. But it should be understood in the context of what happened last year, he said.
"If you'd said in April 2020 that we'd come out of the pandemic at record-breaking volumes and see only a slight spike in mortgage shortages – even though unemployment hit an all-time high and large swaths of the economy for 12 plus months – I believe most in our branch would have been satisfied with it, "said Volpe.