RiskSpan’s Vintage Quality Index estimates the relative “tightness” of credit standards by computing and aggregating the percentage of Agency originations each month with one or more “risk factors” (low-FICO, high DTI, high LTV, cash-out refi, investment properties, etc.). Months with relatively few originations characterized by these risk factors are associated with lower VQI ratings. As the historical chart above shows, the index maxed out (i.e., had an unusually high number of loans with risk factors) leading up to the 2008 crisis.

Vintage Quality Index Stability Masks Purchase Credit Contraction

The first quarter of 2021 provides a stark example of why it is important to consider the individual components of RiskSpan’s Vintage Quality Index and not just the overall value. 

The Index overall dropped by just 0.37 points to 76.68 in the first quarter of 2021. On the surface, this seems to suggest a minimal change to credit availability and credit quality over the period. But the Index’s net stability masks a significant change in one key metric offset by more modest counterbalancing changes in the remaining eight. The percentage of high-LTV mortgages fell to 16.7% (down from 21% at the end of 2020) during the first quarter.  

While this continues a trend in falling rates of high-LTV loans (down 8.7% since Q1 of 2020 and almost 12% from Q1 2019) it coincides with a steady increase in house prices. From December 2020 to February 2021, the Monthly FHFA House Price Index® (US, Purchase Only, Seasonally Adjusted) rose 1.9%. More striking is the year-over-year change from February 2020 to 2021, during which the same rose by 11.1%. Taken together, the 10% increase in home prices combined with a 10% reduction in the share of high-LTV loans paints a sobering picture for marginal borrowers seeking to purchase a home.  

Some of the reduction in high-LTV share is obviously attributable to the growing percentage of refinance activity (including cash-out refinancing, which counterbalances the effect the falling high-LTV rate has on the index). But these refis does not impact the purchase-only HPI. As a result, even though the overall Index did not change materially, higher required down payments (owing to higher home prices) combined with fewer high-LTV loans reflects a credit box that effectively shrank in Q1.

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.