RiskSpan’s Vintage Quality Index, which had declined sharply in the first half of the year, leveled off somewhat in the third quarter, falling just 2.8 points between June and September, in contrast to its 12 point drop in Q2.
This change, which reflects a relative slowdown in the tightening of underwriting standards reflects something of a return to stability in the Agency origination market.
Driven by a drop in cash-out refinances (down 2.3% in the quarter), the VQI’s gradual decline left the standard credit-related risk attributes (FICO, LTV, and DTI) largely unchanged.
The share of High-LTV loans (loans with loan-to-value ratios over 80%) which fell 1.3% in Q3, has fallen dramatically over the last year–1.7% in total. More than half of this drop (6.1%) occurred before the start of the COVID-19 crisis. This suggests that, even though the Q3 VQI reflects tightening underwriting standards, the stability of the credit-related components, coupled with huge volumes from the GSEs, reflects a measure of stability in credit availability.
Risk Layers – September 20 – All Issued Loans By Count
Risk Layers – September 20 – All Issued Loans By Count
Analytical And Data Assumptions
Population assumptions:
- Monthly data for Fannie Mae and Freddie Mac.
- Loans originated more than three months prior to issuance are excluded because the index is meant to reflect current market conditions.
- Loans likely to have been originated through the HARP program, as identified by LTV, MI coverage percentage, and loan purpose are also excluded. These loans do not represent credit availability in the market as they likely would not have been originated today but for the existence of HARP.
Data assumptions:
- Freddie Mac data goes back to 12/2005. Fannie Mae only back to 12/2014.
- Certain fields for Freddie Mac data were missing prior to 6/2008.
GSE historical loan performance data release in support of GSE Risk Transfer activities was used to help back-fill data where it was missing.
An outline of our approach to data imputation can be found in our VQI Blog Post from October 28, 2015.
