Following improvement over multiple quarters, the mortgage critical defect rate surged at the start of 2026, experiencing the biggest quarterly jump in four years, according to a new report.
Early-year mortgage rates brought an influx in the
"The dip below 6% in February pulled a wave of refinance activity through lenders' pipelines almost overnight, and this quarter's data shows the eligibility and compliance friction that came with it," said ACES vice president Nick Volpe in a press release.
The overall critical defect rate increased to 1.71% in the first quarter,
The share also rose 30.5% from 1.31% on a year-over-year basis.
"Q1's swing back above 1.7% is a reminder that mortgage quality doesn't move in a straight line, especially in a rate environment as volatile as this one," Volpe also noted. "For lenders, success in 2026 will likely depend on their ability to flex their QC capacity as quickly as the rate environment is shifting in the current market."
Legal and compliance defects rise for four straight quarters
Although the margin of increase hit a recent high, it remained low by historical standards, and trends show concentrated pressure and procedural errors in oversight rather than any overall deterioration of loan manufacturing standards, according to the report.
"This was a quarter in which loan manufacturing quality and procedural execution moved in opposite directions," ACES researchers wrote.
Still, the legal, regulatory and compliance defect rate came in at its highest in five years, accelerating 5.5% to 26.02% from 24.66% in fourth-quarter 2025. Legal led all defect types for the second consecutive reporting period. It has also risen higher for four straight quarters, pointing to ongoing lapses in the segment.
On the positive end, the error rate declined in three out of four core underwriting categories: assets, credit and income and employment.
- Asset-related defects pulled back to a 10.41% share, compared to 15.25% in the previous report, reversing a three-quarter streak of increases.
- Income and employment errors inched down 20.07% from 21.52% quarter to quarter, finishing as the second most likely type of defect overall.
- Credit defects decreased to 5.2% in the first quarter from 5.38%, representing a small percentage of overall findings.
- Meanwhile, liabilities was the lone core underwriting category to post an increase, albeit a small one, inching up to 10.78% from 10.76%.
Within assets, lenders are seeing higher likelihoods of mistakes coming from calculation and analysis, with the share rising in the first quarter, running counter to recent trends where documentation was the main driver of defects. The same trend was also observed in the income and employment category at a less dramatic pace.
Meanwhile, outside of underwriting, loan documentation came in at an 8.55% defect rate compared to 7.17% in the fourth quarter of 2025. Borrower eligibility saw errors retreat to a 7.43% share in the first quarter, down from 9.87%.
How refinances contributed to Q1's rise
The quarterly defect rate increased, even as mortgage volume contracted. Single-family originations fell to 1.57 million transactions in the first quarter, driven by a slowdown in purchases, which came in at their lowest volume for that specific period in 12 years, the ACES report said.
The purchase market accounted for 37% of all originations, compared to almost 46% for refinances.
The market shift toward the latter led refinance reviews to grow to a 32.05% share, up from 27.37% in last year's fourth quarter. At the same time, the refi-defect share similarly increased to 38.57% from 36.84%.
The brief window of
"In a lean operating environment, low-frequency procedural steps are precisely the ones most likely to be missed when volume in a given loan type rises quickly," the report said.
