RiskSpan VQI: Current Underwriting Standards – Quarter 4 2018
The RiskSpan Vintage Quality Index (“VQI”) rose above, and continued to stay above, 100 in the last quarter of 2018, reaching its highest point in the last decade in October of 2018. The spike was driven by a roughly 2% increase in Cash-out Refinances and a 1.5% increase in investor occupied housing. In the last quarter, RiskSpan onboarded the FNMA and FHLMC daily loan level issuance data onto our Edge Platform, and has begun generating the VQI with our Historical Analytics API. Values for the some historical months of the VQI were re-estimated using the new data sources.
RiskSpan introduced the VQI in 2015 as a way of quantifying the underwriting environment of a particular vintage of mortgage originations. The idea is to provide credit modelers a way of controlling for a particular vintage’s underwriting standards, which tend to shift over time.
The VQI is a function of the average number of risk layers associated with a loan originated during a given month. It is computed using the loan-level historical data released by the GSEs in support of their Credit Risk Transfer initiatives (CRT data) for months prior to December 2005, and using loan level disclosure data supporting MBS issuances through today. The value is then normalized such that January 1, 2003 has an index value of 100. The peak of the index, a value of 139 in December 2007, indicates that loans issued in that month had an average risk layer factor 39% greater (i.e., loans issued that month were 39% riskier) than loan originated during 2003. In other words, lower VQI values indicate tighter underwriting standards (and vice-versa).
Build-Up of VQI
The following chart illustrates how each of the following risk layers contributes to the overall VQI:
- Loans with low credit scores (FICO scores below 660)
- Loans with high loan-to-value ratios (over 80 percent)
- Loans with subordinate liens
- Loans with only one borrower
- Cash-out refinance loans
- Loans secured by multi-unit properties
- Loans secured by investment properties
- Loans with high debt-to-income ratios (over 45%)
- Loans underwritten based on reduced documentation
- Adjustable rate loans
Analytical and Data Assumptions
- Issuance 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 if not for the existence of HARP.
- Freddie Mac data goes back to December 2005. Fannie Mae data only goes back to December 2014.
- Certain Freddie Mac data fields were missing prior to June 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.
Note: The analysis in this blog post was developed using RiskSpan’s Edge Platform. The RiskSpan Edge Platform is a module-based data management, modeling, and predictive analytics software platform for loans and fixed-income securities. Click here to learn more.