A sharp uptick in cash-out refinancing pushed RiskSpan’s Vintage Quality Index (VQI) to its highest level since the first quarter of 2019.

RiskSpan’s Vintage Quality Index computes and aggregates 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.

RiskSpan uses the index principally to fine-tune its in-house credit and prepayment models by accounting for shifts in loan composition by monthly cohort.

Rising Rates Mean More Cash-Out Refis (and more risk)

As the following charts plotting the individual VQI components illustrate, a spike in cash-out refinance activity (as a percentage of all originations) accounted for more of the rise in overall VQI than did any other risk factor.

This comes as little surprise given the rising rate environment that has come to define the first quarter of 2022, a trend that is likely to persist for the foreseeable future.

As we demonstrated in this recent post, the quickly vanishing number of borrowers who are in the money for a rate-and-term refinance means that the action will increasingly turn to so-called “serial cash-out refinancers” who repeatedly tap into their home equity even when doing so means refinancing into a mortgage with a higher rate. The VQI can be expected to push ever higher to the extent this trend continues.

An increase in the percentage of loans with high debt-to-income ratios (over 45) and low credit scores (under 660) also contributed to the rising VQI, as did continued upticks in loans on investment and multi-unit properties as well as mortgages with only one borrower.

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.

Data Source: Fannie Mae PoolTalk®-Loan Level Disclosure