The RiskSpan Vintage Quality Index (“VQI”) edged higher for mortgages originated during February despite remaining low (90.41) by historical, pre-crisis standards. Low-FICO and high-LTV loans continued to trend downward, while high-DTI loans, investment properties, and cash-out refinances continued to rebound after declining through much of 2019.
As the historical trend of risk layering (see below) shows, mortgages with one borrower—now accounting for more than 50 percent of originations—remain a consistent and important driver of the index. High-DTI loans today drive the index more than they did during the years immediately after the 2008 crisis but not nearly so much as they did during the years leading up to it. High-LTV loans continue to be originated in abundance, while adjustable-rate mortgages and loans with subordinate financing, in contrast, have practically vanished.
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 Credit Risk Transfer initiatives (CRT data) for months prior to December 2005, and
- Loan-level disclosure data supporting MBS issuances through today.
The value is then normalized to assign January 1, 2003 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 loans 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
