Mortgage critical defect rate rises to 1.71% in Q1 2026

The mortgage industry’s critical defect rate rose sharply in the first quarter as compliance-related issues increased and lenders saw a resurgence in refinance activity, according to ACES Quality Management‘s quarterly Mortgage QC Industry Trends Report, released Tuesday. The overall critical defect rate increased from 1.38% in the fourth quarter of 2025 to 1.71% in the first quarter of 2026. The rate was also up from 1.31% in the first quarter of 2025. The report analyzes post-closing quality control data from ACES Quality Management & Control software and is based on loan audits selected by lenders for full-file reviews. Legal, regulatory and compliance defects accounted for 26.02% of all defects in Q1 2026, up from 24.66% in the previous quarter. It marked the category’s fourth consecutive quarterly increase, its highest share since Q1 2021 and its second straight quarter as the leading defect category. Income and employment defects fell from 21.52% to 20.07% but remained the second-largest defect category. It was the first time in five years that the category ranked No. 2 in back-to-back quarters, ACES said. Asset defects posted the largest improvement among the major categ...