National data on loan quality released for early 2020
ACES quality management (ACES), a provider of management software for the financial services industry, this week announced the release of the quarterly ACES Mortgage QC Trends Report. The latest report, which provides conclusions on the quality of loans nationwide based on data from the ACES quality management and control software, covers the first quarter of this year.
A number of takeaways the researchers have highlighted include:
- The overall critical defect rate of 1.56% corresponds to the lowest rate in three years;
- Defaults attributed to credit and income categories rebounded after rising in Q4 2019;
- The increase in the share of refinancing (5%) and conventional loans (2%) contributed to the improvement of the overall default rate; and
- Prepayment defaults are on the rise.
ACES Executive Vice President Nick Volpe added that “the combination of falling interest rates, the number of jobs not yet affected by COVID-19 and the steady appreciation in real estate have all contributed to the increase in the share of refinances and conventional loans, which in turn led to the continued decline in the overall critical default rate seen in the first quarter, however, the final weeks of the quarter marked the start of the pandemic COVID-19, and given the economic impact of the pandemic on consumers, the number of prepayment defaults has increased, as one would expect.
He went on to say, “Data from the start of the second quarter shows that the number of EPDs reviewed by lenders through ACES is 75% higher than the average monthly EPD review rate for 2019. Because an EPD review is only triggered when borrowers fall three or more payments. behind, it indicates that the industry is still in the early stages of the problem, and there is a high probability that the number of EPD will continue to increase, ”added Volpe.
The Q1 2020 ACES Mortgage QC Industry Trends Report is drawn from national post-close quality control loan data for over 90,000 unique loans selected for random full case reviews, as captured by the system ACES quality control and management benchmarking of the company. Defects listed in the report are categorized using the Fannie Mae’s Taxonomy of Loan Defaults.
“Amid the chaos and uncertainty brought on by COVID-19, data offers a clear path for lenders. While the industry has focused on managing near historic volumes, the first quarter loan default data also indicates that lenders must also turn their attention to the growing problem of EPDs, as this represents a transaction and a significant financial risk to their organizations, ”ACES said. CEO Trévor Gauthier.
Another summary broke down the following:
- The overall critical defect rate fell to 1.56% in the first quarter of 2020, corresponding to the third quarter of 2019 and representing a multi-year low. The previous low was 1.53% in the fourth quarter of 2016. The rate for the current quarter is 9.8% lower than the rate of 1.73% in the previous quarter.
- With a good start to 2020, the market is benefiting from the combination of lower interest rates, a number of jobs not yet affected by COVID-19 and a steady appreciation in real estate. All of these factors have contributed to the increase in the share of refinances and conventional loans, which historically have fewer manufacturing defects.
- Borrowers also saw an opportunity to withdraw money from properties through cash refinances. Freddie Mac’s refinance data sets show that 42% of all refinances had loan amounts of 5% or more than the refinanced balance.
The entire report is accessible here.