The RiskSpan Vintage Quality Index (“VQI”) indicates that we are entering the current economic downturn with a cohort of mortgages that were far more conservatively originated than the mortgages in the years leading up to the 2008 crisis. The VQI dropped three points for mortgages originated during March to finish the first quarter of 2020 at 87.77. This reflects generally tight underwriting standards leading into the COVID-19 crisis, though not nearly as tight as what was witnessed in the years immediately following the housing finance crisis.
The VQI climbed slightly during the first two months of the year—evidencing a mild loosening in underwriting standards—peaking at just over 90 in February, before dropping to its current level in March. The following chart illustrates the historical trend of risk layering that contributes to the VQI and how that layering has evolved over time. Mortgages with one borrower—now accounting for more than 50 percent of originations—remain a consistent and important driver of the index and continued to climb during Q1. High-DTI loans, which edged higher in Q1, continue to drive the index today but not nearly to the degree they did in the years leading up to the 2008 crisis.
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