Critical Default Rate of Closed Loans Rises in Q2 Due to COVID-19
Critical defaults found in closed mortgage files were at their highest level since 2018 in the second quarter, due to conditions created by the pandemic, a review conducted by Aces Quality Management found.
The overall critical defect rate was 1.88% for the second quarter, compared to 1.56% in the first quarter and 1.72% in the second quarter of 2019.
“While evidence of the impact of COVID-19 on loan quality was present in the first quarter data, it is in the second quarter that the ‘COVID effect’ becomes really apparent, driving the rate of critical defaults. the highest since the fourth quarter of 2018 ”when it was 1.93%, said Aces executive vice president Nick Volpe.
“One of the main drivers of this increase has been the increase in income / employment defaults – a most surprising result given the challenges almost all employers facing the transition to a remote working environment, ”he added.
However, linked to the pandemic job losses became a highlight in the second quarter.
The U.S. government and U.S. businesses together employed about 152 million people in February, according to data from the Bureau of Labor Statistics. By the end of April, that number had fallen to 130 million, due to closures and restrictions derived from COVID.
“The scale and speed of the job losses were simply overwhelming, and the interest rate environment, the government’s injection of stimulus, the increase in home values and others. Positive macroeconomic factors were simply overtaken by COVID, ”the Aces report said.
It is not surprising that most of the critical flaws were found in the income and employment category. (Aces uses Fannie Mae’s taxonomy of loan defaults to categorize its findings.) The company found that out of all 2Q origins with defaults, 30.19% were related to income and employment, up from almost 12% compared to 18.35% in the previous quarter.
Loans with defaults attributed to assets occupied a share of 12.26% (vs. 10.09% in the first quarter) while credit represented 18.87% (vs. 17.43%) of all loans with defaults in the second trimester. The increase in these categories is probably a function of the demanding secondary market income and employment audits closer to the loan closing date. Lenders often recheck employment on the closing date.
“This adds complexity to an already rushed process, and the the difficulty is aggravated by most employers themselves being in a work-from-home situation, ”the Aces report said.
Legal defects were the only other category with a quarter-over-quarter increase from 6.42% to 9.43%.
The remaining seven defect categories all declined in the second quarter from the first, including valuations, which fell from 5.5% to 4.25%. But Aces attributed this to the increase in loans with property inspection exemptions granted by agencies due to the pandemic.
Meanwhile, the number of exams performed by Aces due to early payment default continued to soar in the third quarter, up 197% from pre-2019 pandemic levels. In the second quarter, that figure was up 139%.
And it is simply “too early to predict when EPDs will peak,” said Aces CEO Trevor Gauthier. “Any continued rise is likely to exacerbate long-term default and loss rates, signaling that lenders must remain vigilant about the risks this could pose to their organizations.”