Mortgage quality control defects declined sharply in the fourth quarter of 2025, even as lenders continued to grapple with a rise in eligibility-related issues tied to affordability pressures and increased refinance activity, according to a new report released Wednesday by ACES Quality Management.
In its quarterly Mortgage QC Industry Trends Report, the company found that the overall critical defect rate fell to 1.38% of all loans in the fourth quarter, down from 1.79% in the third quarter of 2025. The decline marked the first quarterly improvement after three straight quarters of rising defect rates.
For 2025 as a whole, the average critical defect rate was 1.5%, essentially unchanged from 1.52% in 2024, suggesting the industry maintained relatively stable manufacturing quality despite affordability pressures and market volatility.
“Lenders ended 2025 on a strong note, with Q4 delivering a meaningful drop in the critical defect rate and the full-year average holding essentially flat versus 2024,” Nick Volpe, executive vice president at ACES Quality Management, said in a statement.
“But the year’s defining shift toward eligibility-driven defects as refinance activity returned indicates that disciplined documentation and consistent eligibility decisioning will define quality in 2026.”
The report, which analyzed tens of thousands of post-closing quality control reviews through the ACES benchmarking platform, said the Q4 improvement reflected broad improvement across underwriting categories — including declines in income and employment, credit and insurance defects.
Still, legal, regulatory and compliance issues climbed to 24.66% of all defects, reclaiming the top defect category for the second time since late 2024. The report attributed the increase largely to operational pressures tied to the return of refinance lending, including disclosure timing issues, documentation gaps and compliance checks tied to qualified mortgage and anti-predatory lending rules.
Income and employment defects, which had previously led all categories, fell to a share of 21.52% in the fourth quarter. The credit defect share declined to 5.38%, while the insurance defect share dropped to 1.35%.
The report identified borrower eligibility as one of the industry’s fastest-growing quality concerns. Borrower and mortgage eligibility defects rose 291.58% year over year in 2025, while credit defects increased 166.13%.
ACES said the shift reflected borrowers “stretching to qualify” in an affordability-constrained housing market, with lenders increasingly encountering loans near program eligibility thresholds.
Refinance lending became a larger share of the market during the year as mortgage rates eased. The refinance review share nearly doubled from 11.14% in 2024 to 21.04% in 2025, while the refinance defect share more than doubled, rising from 15.3% to 32.2%.
ACES said refinance originations industrywide surpassed purchase originations in the fourth quarter for the first time in about four years, as mortgage rates fell to 6.15% by the end of 2025 and dipped below 6% in early 2026.
The report also found the refinance defect share and review share reached near parity during the quarter, suggesting lenders were beginning to adjust operationally to the resurgence in refinance activity.
By loan type, Federal Housing Administration (FHA) loans continued to account for a disproportionately high share of defects relative to review volume, representing 30.86% of defects for the year.
The U.S. Department of Veterans Affairs (VA) defect share also rose for the second consecutive quarter in Q4 2025, with ACES noting that this warrants additional scrutiny due to the compliance risks associated with serving active-duty military borrowers.
The report also pointed to broader economic and industry changes shaping mortgage quality trends. Publicly traded lenders posted higher origination volumes in 2025, led by United Wholesale Mortgage (UWM) at $163 billion and Rocket Mortgage at $130 billion.
ACES said lender consolidation and acquisitions aimed at building refinance “recapture” platforms may have contributed to some of the compliance and eligibility variability seen during the year as lenders integrated systems, vendors and workflows.
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