Mortgage Defects Stabilize As Lenders Face New Quality Control Challenges

Mortgage lenders are seeing loan defects stabilize after several volatile years, but shifts in interest rates and loan volumes continue to expose weaknesses in quality control (QC), according to ACES Quality Management CEO Trevor Gauthier and chief operating officer Phil McCall.

In an interview with HousingWire, Gauthier and McCall highlighted staffing cuts, refinance surges and uneven technology adoption as reasons for high loan buyback risks, and they encouraged lenders to focus on earlier, more proactive quality checks as they head into 2026.

Editor’s note: This interview has been edited for length and clarity.

Sarah Wolak: Broadly speaking, how would each of you describe the current state of quality control in the industry compared to previous years?

Phil McCall: We’ve gone through a couple of tough years within the lending industry, and with it, we saw lots of reductions in force, cutting back on staff, etc. In 2025, we started to see stability within the staffing on the QC side.

With originations, I think everything has been filtered down to the lowest cost possible to get these originations through. You’re going to have changes quarter to quarter of what’s happening within the market, within your industry, and where you’re adjusting it. Sometimes we get a little bit of a rate drop, and suddenly you have a little refi surge.

So there’s a big boost of business coming there. And with it, you tend to find that those surges will create a few more defect problems. When volumes ease, assuming they don’t trigger another round of staff reductions, defect levels tend to settle back into a more normal range.

Wolak: That makes sense as lenders rely heavily on people to absorb volume swings, and without better ways to scale, if you have more volume, then there’s more opportunity for defects to happen.

Trevor Gauthier: Defects mix is also really a big part of the story. We’ve had income and employment issues being in the lead, but there are other categories that start to surge a little bit. There’s eligibility, there’s collateral, regulatory issues and the like. I think the headline of the whole thing is, though relatively low, these defects, types and concentrations can really change rather quickly.

Wolak: Can you share how the defects are typically impacting lenders and servicers, especially when there are buybacks from the GSEs involved?

McCall: As long as you’re delivering closed loans in the secondary market, there is the potential for buybacks. And again, I see those ebbs and flows that point more to the GSEs as a starting point. The requirements and disclosures and transparency of defect reporting has become so much clearer over the past decade, which has helped lenders better understand what they’re dealing with and how to handle defects when they arise.

A few years ago, [when] indemnifications were flying left and right, I heard so much from the lending community. The GSEs eventually recognized they couldn’t continue down that path indefinitely, so there’s been more of a shift toward fee and pricing adjustments that reflect the severity of defects and their impact on overall loan performance.

From a lender standpoint, [the focus has been on how they] can manage internally, put up lines of defense and identify the defects that truly create risk. Employment and income defects are on the rise. Certain pockets of the U.S. are suffering a little bit when it comes to valuation, and if you start getting into appraisal defects in areas that are in a little bit of a downward slide here, as far as values, those become very high risk. And you want to manage your quality from that standpoint of understanding where those risks are. What can I do to mitigate the risk, especially in those high-risk areas?

Valuation is one that we see more and more. You can’t afford much of a mistake, because if you know you’re hitting where you are, and you see a 5% reduction in value over the next year, boy, that mistake could start to get really expensive.

Wolak: Are there other areas that you’re seeing more defects or lender pain points arise when dealing with defects?

McCall: Valuation is one defect that continues to amaze us all forever. There’s been all sorts of automation that’s been created, like AI rules engines for how to properly calculate employment income. But it’s still, after probably billions of dollars being invested into it, a major problem.

We’re in a changing market, so there are some new products that are coming out. It really is the operational side of your mortgage lenders being in tight communication with your risk side and that quality control. So as products are being rolled out, as new areas are being ventured into, there’s a tight relationship there, and the operations have that great understanding of quality and making sure that they have the actual processes in place.

When you keep your QC team tight with your operations and they work together, we see such great success from the lending community for how their overall quality improves.

Wolak: I did want to ask about the recent acquisition of BaseCap that ACES announced this week. How does this deal help lenders manage quality control and what areas does the acquisition impact?

Gauthier: We’re super excited about BaseCap. We’ve been heading down a path of proactive versus reactive quality control. And what that means for us is that ACES’s platform already goes deep, but we wanted to get earlier in the process and be able to test broader parts of their portfolios, or their entire servicing area, and do just a few specific fields or or be able to track changes on very specific fields.

BaseCap has built out a nice platform that ties in nicely to ACES. It will help with data cleansing and also the ability to do population-level testing, so that the QC teams can really start to identify those pockets of risk earlier on in the process.

McCall: We’ve had concerns as we had some rate drops and [lenders saying that] we need technology to help us scale for these changes in the business — and we need to do more with it. I can’t think of one customer or lender that I’ve talked to that ever says anything about wanting to reduce staff. It is more about how they can do more.

I think that is a piece that we’ve had on our road map, and our vision is to bring technology in. BaseCap really lines us up to deal with much larger datasets and being able to do much more of the automated checks that can take place.

Gauthier: I think another key point there — and you think about the marrying of ACES with BaseCap — is that it isn’t just about identifying the defects. There are a lot of platforms that are looking to get into that space. But what do you do when you’re managing a massive population or servicing portfolio, and you have 46,000 defects that show up on your door?

What’s nice about the marrying of BaseCap with ACES is we have the platform that can help them manage the defects, communicate them, do all the reporting and have the automated workflow. Otherwise, folks are going to be overwhelmed.

Wolak: The mortgage industry in general has lagged in adopting technology. Do you think that has played a part in why lenders often don’t catch defects until the loan is about to close, or do you think there is another reason?

Gauthier: It’s challenging because I think there’s frustration on both sides. Procurement is really challenging, but it’s so highly regulated, and the data that folks are dealing with is so sensitive. And because of all of those things — and with the regulations that are getting pressed down on them, and the fact that it’s such sensitive information — it kind of puts the industry at a little bit of a standstill to be able to adopt these technologies, which will maybe make mistakes.

They’re already worried about mistakes that are being made manually. Now you’re going to introduce technology into it that can do it at scale — there’s a fear factor there. I think the reality is that this technology has been improving. Those mistakes are certainly going to be in the favor of the technology, meaning we’re doing a better job, but I think it’s just taken a while for folks to get used to that.

Technology is changing rapidly, particularly with AI. I think everybody would like to leverage it, but there’s certainly a fear factor with it. The highly regulated nature of the market that we play in doesn’t necessarily allow for bleeding-edge technology, and it’s just going to be slow to come in a lot of areas. It’s not just the QC space — it’s across the board.