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Articles Tagged with: Credit Analytics

Surge in Cash-Out Refis Pushes VQI Sharply Higher

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


Asset Managers Improving Yields With Resi Whole Loans

An unmistakable transformation is underway among asset managers and insurance companies with respect to whole loan investments. Whereas residential mortgage loan investing has historically been the exclusive province of commercial banks, a growing number of other institutional investors – notably life insurance companies and third-party asset managers – have shifted their attention toward this often-overlooked asset class.

Life companies and other asset managers with primarily long-term, risk-sensitive objectives are no strangers to residential mortgages. Their exposure, however, has traditionally been in the form of mortgage-backed securities, generally taking refuge in the highest-rated bonds. Investors accustomed to the AAA and AA tranches may understandably be leery of whole-loan credit exposure. Infrastructure investments necessary for managing a loan portfolio and the related credit-focused surveillance can also seem burdensome. But a new generation of tech is alleviating more of the burden than ever before and making this less familiar and sometimes misunderstood asset class increasingly accessible to a growing cadre of investors.

Maximizing Yield

Following a period of low interest rates, life companies and other investment managers are increasingly embracing residential whole-loan mortgages as they seek assets with higher returns relative to traditional fixed-income investments (see chart below). As highlighted in the chart below, residential mortgage portfolios, on a loss-adjusted basis, consistently outperform other investments, such as corporate bonds, and look increasingly attractive relative to private-label residential mortgage-backed securities as well.

Nearly one-third of the $12 trillion in U.S. residential mortgage debt outstanding is currently held in the form of loans.

And while most whole loans continue to be held in commercial bank portfolios, a growing number of third-party asset managers have entered the fray as well, often on behalf of their life insurance company clients.

Investing in loans introduces a dimension of credit risk that investors do need to understand and manage through thoughtful surveillance practices. As the chart below (generated using RiskSpan’s Edge Platform) highlights, when evaluating yields on a loss-adjusted basis, resi whole loans routinely generate yield.

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In addition to higher yields, whole loans investments offer investors other key advantages over securities. Notably:

Data Transparency

Although transparency into private label RMBS has improved dramatically since the 2008 crisis, nothing compares to the degree of loan-level detail afforded whole-loan investors. Loan investors typically have access to complete loan files and therefore complete loan-level datasets. This allows for running analytics based on virtually any borrower, property, or loan characteristic and contributes to a better risk management environment overall. The deeper analysis enabled by loan-level and property-specific information also permits investors to delve into ESG matters and better assess climate risk.

Daily Servicer Updates

Advancements in investor reporting are increasingly granting whole loan investors access to daily updates on their portfolio performance. Daily updating provides investors near real-time updates on prepayments and curtailments as well as details regarding problem loans that are seriously delinquent or in foreclosure and loss mitigation strategies. Eliminating the various “middlemen” between primary servicers and investors (many of the additional costs of securitization outlined below—master servicers, trustees, various deal and data “agents,” etc.—have the added negative effect of adding layers between security investors and the underlying loans) is one of the things that makes daily updates possible.

Lower Transaction Costs

Driven largely by a lack of trust in the system and lack of transparency into the underlying loan collateral, private-label securities investments incur a series of yield-eroding transactions costs that whole-loan investors can largely avoid. Consider the following transaction costs in a typical securitization:

  • Loan Data Agent costs: The concept of a loan data agent is unique to securitization. Data agents function essentially as middlemen responsible for validating the performance of other vendors (such as the Trustee). The fee for this service is avoided entirely by whole loan investors, which generally do not require an intermediary to get regularly updated loan-level data from servicers.
  • Securities Administrator/Custodian/Trustee costs: These roles present yet another layer of intermediary costs between the borrower/servicer and securities investors that are not incurred in whole loan investing.
  • Deal Agent costs: Deal agents are third party vendors typically charged with enhancing transparency in a mortgage security and ensuring that all parties’ interests are protected. The deal agent typically performs a surveillance role and charges investors ongoing annual fees plus additional fees for individual loan file reviews. These costs are not borne by whole loan investors.
  • Due diligence costs: While due diligence costs factor into loan and security investments alike, the additional layers of review required for agency ratings tends to drive these costs higher for securities. While individual file reviews are also required for both types of investments, purchasing loans only from trusted originators allows investors to get comfortable with reviewing a smaller sample of new loans. This can push due diligence costs on loan portfolios to much lower levels when compared to securities.
  • Servicing costs: Mortgage servicing costs are largely unavoidable regardless of how the asset is held. Loan investors, however, tend to have more options at their disposal. Servicing fees for securities vary from transaction to transaction with little negotiating power by the security investors. Further, securities investors incur master servicing fees which is generally not a required function for managing whole loan investments.

Emerging technology is streamlining the process of data cleansing, normalization and aggregation, greatly reducing the operational burden of these processes, particularly for whole loan investors, who can cut out many of these intermediary parties entirely.

Overcoming Operational Hurdles

Much of investor reluctance to delve into loans has historically stemmed from the operational challenges (real and perceived) associated with having to manage and make sense of the underlying mountain of loan, borrower, and property data tied to each individual loan. But forward-thinking asset managers are increasingly finding it possible to offload and outsource much of this burden to cloud-native solutions purpose built to store, manage, and provide analytics on loan-level mortgage data, such as RiskSpan’s Edge Platform supporting loan data management and analytics. RiskSpan solutions make it easy to mine available loan portfolios for profitable sub-cohorts, spot risky loans for exclusion, apply a host of credit and prepay scenario analyses, and parse static and performance data in any way imaginable.

At an increasing number of institutions, demonstrating the power of analytical tools and the feasibility of applying them to the operational and risk management challenges at hand will solve many if not most of the hurdles standing in the way of obtaining asset class approval for mortgage loans. The barriers to access are coming down, and the future is brighter than ever for this fascinating, dynamic and profitable asset class.


Will a Rising VQI Materially Impact Servicing Costs and MSR Valuations?

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.

Will a rising VQI translate into higher servicing costs?

The Vintage Quality Index continued to climb during the third quarter of 2021, reaching a value of 85.10, compared to 83.40 in the second quarter. The higher index value means that a higher percentage of loans were originated with one or more defined risk factors.

The rise in the index during Q3 was less dramatic than Q2’s increase but nevertheless continues a trend going back to the start of the pandemic. The increase continues to be driven by a subset of risk factors, notably the share of cash-out refinances and investor properties (both up significantly) and high-DTI loans (up modestly). On balance, fewer loans were characterized by the remaining risk metrics.

What might this mean for servicing costs?

Servicing costs are highly sensitive to loan performance. Performing Agency loans are comparatively inexpensive to service, while non-performing loans can cost thousands of dollars per year more — usually several times the amount a servicer can expect to earn in servicing fees and other ancillary servicing revenue.

For this reason, understanding the “vintage quality” of newly originated mortgage pools is an element to consider when forecasting servicing cash flows (and, by extension, MSR pricing).

Each of the risk layers that compose the VQI contributes to marginally higher default risk (and, therefore, a theoretically lower servicing valuation). But not all risk layers affect expected cash flows equally. It is also important to consider the VQI in relationship to its history. While the index has been rising since the pandemic, it remains relatively low by historical standards — still below a local high in early 2018 and certainly nowhere near the heights reached leading up to the 2008 financial crisis.

A look at the individual risk metrics driving the increase would also seem to reduce any cause for alarm. While the ever-increasing number of loans with high debt-to-income ratios could be a matter of some concern, the other two principal contributors to the overall VQI rise — loans on investment properties and cash-out refinances — do not appear to jeopardize servicing cash flows to the same degree as low credit scores and high DTI ratios do.

Consequently, while the gradual increase in loans with one or more risk factors bears watching, it likely should not have a significant bearing (for now) on how investors price Agency MSR assets.

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.


Value Opportunities in Private-Label Investor Loan Deals

The supply of investor loan collateral in private securitizations has surged in 2021 and projects to remain high (more on this below). To gain an informational edge while selecting bonds among this new issuance, traders and investors have asked RiskSpan for data and tools to dissect the performance of investor loans. Below, we first show the performance of investor loans compared to owner-occupied loans, and then offer a glimpse into a few relative value opportunities using our data and analytics platform, Edge.

As background, the increase of investor loan collateral in PLS was spurred by a new FHFA policy, recently suspended, that capped GSE acquisitions of investor and second home loans at 7% of seller volume. This cap forced originators to explore private-label securitization which, while operationally more burdensome than GSE execution, has been more profitable because it bypasses the GSEs’ high loan-level pricing adjustments. Now that this difficult but rewarding PLS path has been more widely traveled, we expect it to become more efficient and to remain popular, even with the GSE channel reopening.

Subsector Performance Comparison: Investor Vs. Owner-Occupied Loans

Investor Loans Promise Longer Collection of Above-Market Rates

Compared to owner-occupants, investors have historically paid above-market mortgage rates for longer periods before refinancing. Figure 1 shows the prepayment rates of investors vs. owner-occupants as a function of refinance incentive (the borrower’s note rate minus the prevailing mortgage rate). As their flatter “s-curve” shows, the rise in investor prepayments as refinance incentive increases is much more subdued than for owner-occupants.

Crucially, this relationship is not fully explained by higher risk-based pricing premiums on investor loans. Figure 2 shows the same comparison as Figure 1 but only for loans with spreads at origination (SATO) between 50 and 75 bps. The categorical difference between owner-occupied and investor prepay speeds is partially reduced but clearly remains. We also tried controlling for property type, but the difference persists. The relative slowness of investors may result from investors spreading their attention across many elements of their P&L besides interest expense, from higher underwriting obstacles for a rental income-driven loan, and/or from lenders limiting allocation of credit to the investor type.

While we plot these graphs over a five-year lookback period to balance desires for recency and sample size, this relationship holds over shorter and longer performance periods as well.


Figure 1: The Investor Loans S-Curve is Significantly Flatter Than the Owner-Occupied Curve
Investor s-curve vs. owner-occupied s-curve. Includes prime credit, no prepayment penalty, original loan size $200K-$400K, ages 6-48 months for the past 5yr period performance.

Source: CoreLogic’s Private-Label RMBS Collateral Dataset, RiskSpan. Note: because the increase in private-label investor loan volume is coming from Agency cutbacks, the historical performance of investor loans within both Agency and private-label datasets are relevant to private-label investor loan future performance. In this analysis we show private-label data because it straightforwardly parses voluntary prepays vs. defaults, which of course is a critical distinction for PL RMBS investors. Nonetheless, where applicable, we have run the analyses in both datasets, each of which corroborates the performance patterns we show.


Figure 2: Even Controlling for SATO, The Investor vs. Owner-Occupied S-Curve Difference Persists

Same as Figure 1 but includes only loans with SATO between 50-75 bps Source: CoreLogic, RiskSpan


Investor Loans Pose Comparable Baseline Risk, Greater Downside Risk to Credit Investors

Credit performance of investor loans has been worse than owner-occupied loans during crises, which justifies a pricing premium. During benign periods, investor loans have defaulted at similar or lower rates than owner-occupied loans – presumably due to more conservative LTVs, FICOs and DTIs among the investor loan type – and have therefore been profitable for credit investors during these periods. See Figure 3.


Figure 3: Investor Loans Have Defaulted at Greater Rates During Crises and Similar Rates in Other Periods vs. Owner-Occupied Loans
Default rates over time, investor loans vs. owner-occupied. Includes prime credit, ages 12-360 months.

Source: CoreLogic, RiskSpan

Relative Value Opportunities Within Investor Loans

California Quicker to Refinance

California has the largest share of U.S. investor mortgages, as it does with all residential mortgages. California borrowers, both investors and owner-occupieds, have exhibited a steeper response to refinance incentives than have borrowers in other states. Figure 4 shows the comparison focusing on investors. While historical home price appreciation has enabled refinances in California, it has done the same in many states. Therefore, the speed differences point to a more active refinance market in California. All else equal, then, RMBS investors will prefer less California collateral.


Figure 4: California Prepays Significantly Faster In the Money
Investor s-curves bucketed by geography (California vs. Other). Includes prime credit, no prepayment penalty, original loan size $200k-$400k, ages 6-48 months for the past 3yr performance period.

Source: CoreLogic, RiskSpan


For AAA Investors, Limited-Doc Investor Loans May Offer a Two-Sided Benefit: They Buoy Premium Bonds, and a Small Sample Suggests They Lift Discount Bonds, Too

Limited-doc investor loans offer senior tranche holders the chance to earn above-market rates for longer than full-doc investor loans, a relative edge for premium bonds (Figure 5). This is intuitive; we would expect limited-doc borrowers to face greater obstacles to refinancing. This difference holds even controlling for spread at origination. Based on a smaller sample, limited-doc investor loans have also turned over more (see greater prepay rates in the negative refinance incentive bucket). This may result from a correlation between limited documentation and more rapid flipping into the rising HPI environment we have had nationally throughout the past seven years. If so, this would mean that limited-doc investor loans also help discount bonds, relative to full-doc investor loans, accelerate repayments at par.

Because limited-doc investor loans are rare in the RMBS 2.0 era, we widened the performance period to the past seven years to get some sample in each of the refinance incentive buckets. Nonetheless, with all the filters we have put on to isolate the effect of documentation type, there are only a few hundred limited-doc investor loans in the negative refinance incentive buckets.


Figure 5: Limited-Doc Investor Loans Have Prepaid Slower In-The-Money and Faster Out-of-the-Money
Investor s-curves bucketed by doc type. Includes prime credit, no prepayment penalty, original loan size $400K-$800K, ages 6-48 months, SATO 25-125bps for the past 7yr performance period.

Source: CoreLogic, RiskSpan


Size Affects Refi Behavior – But Not How You Think

An assumption carried over from Agency performance is that rate-driven prepays get likelier as loan size increases. This pattern holds across conforming loan sizes, but then reverses and refinance response gets flatter again as balances cross $800K. This is true for investor and owner-occupied loans in both Agency and private-label loan data, though of course the number of loans above $800K in the Agency data is small. Figure 6 shows this pattern for private-label investor loans. As shown, in-the-money prepayments are slowest among loans below $200K, as we would expect. But despite their much higher motivation to refinance, loans above $800K have similar S-curves to loans of just $200K-$400K.

The SATO is generally a few basis points higher for these largest loans, but this does not explain away the speed differences. Figure 7 shows the same comparison as Figure 6 except only for loans with SATO between 50-75 bps. Except for a slightly choppier graph because of the reduced sample size, the same rank-ordering is evident. Nor does controlling for property type or geography remove the speed differences. The largest loans, we conclude, have fewer credit alternatives and/or face more stringent underwriting hurdles than smaller loans, hampering their refi rates.

Rate refinances are fastest among the mid-sized loans between $400K-$600K and $600K-$800K. That these last two groups have similar S-curves – despite the greater dollar motivation to refinance for the $600K-$800Kgroup – suggests that the countervailing effect of lower ability to find refinancing outlets is already kicking in for the $600K-$800K size range.

All of this means that high-balance collateral should be more attractive to investors than some traditional prepayment models will appreciate.


Figure 6: The Largest Investor Loans Refinance Slower Than Medium-Sized
Investor s-curves bucketed by loan size. Includes prime credit, no prepayment penalty, ages 6-48 months for the past 5yr performance period.

Source: CoreLogic, RiskSpan


Figure 7: Controlling For SATO, Largest Investor Loans Still Refinance Slower Than Medium-Sized
Same as Figure 4 but includes only loans with SATO between 50-75 bps

Source: CoreLogic, RiskSpan


Preliminarily, Chimera Has Lowest Stressed Delinquencies of Top Investor Shelves

For junior-tranche, credit-exposed investors in the COVID era, 60-day-plus delinquencies have been significantly rarer on Chimera’s shelf than on other top investor shelves. The observable credit mixes of the three shelves appear similar. We ran this analysis with only full-doc loans and from only one state (California), and the rank-ordering of delinquency rates by shelves remains the same. Further to this point, note that the spread at origination of Chimera’s shelf is nearly as high as Flagstar’s. All of this suggests there is something not directly observable about Chimera’s shelf that has generated better credit performance during this stressed period. We caution that differences in servicer reporting of COVID forbearances can distort delinquency data, so we will continue to monitor this performance as our data updates each month.


Figure 8: Chimera Posts Lowest COVID Delinquencies, with Nearly Highest SATO of Top Investor Shelves
Investor DQ60+ rates over time, bucketed by shelf. Includes prime credit, ages 12-60 months.


Source: CoreLogic, RiskSpan


The Greater Default Risk of Low-Doc Investor Loans Lasts About 10 Years

Low-doc investors default more frequently than full-doc investors, but only during the first roughly 120 months of loan age. Around this age, the default rates converge. For loans seasoned beyond this age, full-doc loans begin to default slightly more frequently than low-doc loans, likely due to a survivorship bias. This suggests that credit investors are wise to require a price discount for new issuance with low-doc collateral. For deals with heavily seasoned collateral, junior-tranche investors may counterintuitively prefer low-doc collateral — certainly if they can earn an extra risk premium for it, as it would seem they are not actually bearing any extra credit risk.


Figure 9: Low-Doc Investor Loans Default More Frequently Than Full-Doc Until Loan Age = 120
Investor default rates over time, bucketed by doc type. Includes prime credit, RMBS 2.0 era, for the past 7yr performance period.

Source: CoreLogic, RiskSpan


Summary

  • Investor loans face higher barriers to refinance than owner-occupied, offering RMBS investors the opportunity to earn higher coupons for longer periods.
  • For junior tranche investors, the credit performance of investor loans has been similar to owner-occupied loans during benign economic periods and worse during stressed times.
  • California borrowers respond more quickly to refinance incentives than borrowers from other states; investors will prefer less California collateral.
  • Limited-doc investor loans offer AAA investors a double benefit: slower refinances in the money, extending premium bonds; and faster turnover out of the money, limiting extension risk.
  • Low loan balances are attractive for their slow refinance response – as are non-conforming (high) loan balances above $800K. Traditional prepay models may miss this latter dynamic.
  • For credit investors, Chimera’s delinquency rates have been significantly better during the pandemic than other investor shelves. We will continue to monitor this as different ways of reporting COVID forbearances may confound such comparisons.
  • For credit investors, limited-doc investor loans default at higher rates than full-doc loans for about the first ten years of loan age; after this point the two perform very similarly, with limited-doc loans defaulting at slightly lower rates among these seasoned loans, likely due to survivor biases.


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Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate an S-curve, aging curve, or time series.


RiskSpan Named to Inaugural STORM50 Ranking by Chartis Research – Winner of “A.I. Innovation in Capital Markets”

Chartis Research has named RiskSpan to its Inaugural “STORM50” Ranking of leading risk and analytics providers. The STORM report “focuses on the computational infrastructure and algorithmic efficiency of the vast array of technology tools used across the financial services industry” and identifies industry-leading vendors that excel in the delivery of Statistical Techniques, Optimization frameworks, and Risk Models of all types. 

RiskSpan’s flagship Edge Platform was a natural fit for the designation because of its positioning squarely at the nexus of statistical behavioral modeling (specifically around mortgage credit and prepayment risk) and functionality enabling users to optimize trading and asset management strategies.  Being named the winner of the “A.I. Innovation in Capital Markets” solutions category reflects the work of RiskSpan’s vibrant innovation lab, which includes researching and developing machine learning solutions to structured finance challenges. These solutions include mining a growing trove of alternative/unstructured data sources, anomaly detection in loan-level and other datasets, and natural language processing for constructing deal cash flow models from legal documents.

Learn more about the Edge Platform or contact us to discuss ways we might help you modernize and improve your mortgage and structured finance data and analytics challenges. 


RiskSpan VQI: Agency Mortgage Risk Layers for Q2 2021

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 Home Prices Contribute to More High-DTI Loans and Cash-out Refis

The Vintage Quality Index rose noticeably during the second quarter of 2021 — up to a value of 83.40, compared to 76.68 in the first quarter.

Unlike last quarter, when a precipitous drop in high-LTV loans effectively masked and counterbalanced more modest increases in the remaining risk metrics, this quarter’s sizeable VQI jump is attributable to a more across-the-board increase in risk layers.

A sharp rebound in the percentage of high-LTV loans, a metric that had been in steady decline since the middle of 2019, was accompanied by modest increases in borrowers with low credit scores (FICO below 660) and high debt-to-income ratios (greater than 45%).

The spike in home prices across the country that likely accounts for the rise in high-LTV mortgages also appears to be prompting an increasing number of borrowers to seek cash-out refinancings. More than 22 percent of originations had LTVs in excess of 80 percent at the end of Q2, compared to just 17 percent at the end of Q1. Similarly, nearly 25 percent of mortgages were cash-out refis in June, compared to 22 percent in March.

Modest declines were observed in the percentages of loans on investment and multi-unit properties. All other risk metrics were up for the quarter, as the plots below illustrate.

Population assumptions:

  • Monthly data for Fannie Mae and Freddie
  • Loans originated more than three months prior to issuance are excluded because the index is meant to reflect current market
  • 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

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.


Mortgage DQs by MSA: Non-Agency Performance Chart of the Month

This month we take a closer look at geographical differences in loan performance in the non-agency space. The chart below looks at the 60+ DPD Rate for the 5 Best and Worst performing MSAs (and the overall average). A couple of things to note:

  • The pandemic seems to have simply amplified performance differences that were already apparent pre-covid. The worst performing MSAs were showing mostly above-average delinquency rates before last year’s disruption.
  • Florida was especially hard-hit. Three of the five worst-performing MSAs are in Florida. Not surprisingly, these MSAs rely heavily on the tourism industry.
  • New York jumped from being about average to being one of the worst-performing MSAs in the wake of the pandemic. This is not surprising considering how seriously the city bore the pandemic’s brunt.
  • Tech hubs show strong performance. All our best performers are strong in the Tech industry—Austin’s the new Bay Area, right?

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RiskSpan VQI: Current Underwriting Standards Q1 2021

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.                                                


EDGE: New Forbearance Data in Agency MBS

Over the course of 2020 and into early 2021, the mortgage market has seen significant changes driven by the COVID pandemic. Novel programs, ranging from foreclosure moratoriums to payment deferrals and forbearance of those payments, have changed the near-term landscape of the market.

In the past three months, Fannie Mae and Freddie Mac have released several new loan-level credit statistics to address these novel developments. Some of these new fields are directly related to forbearance granted during the pandemic, while others address credit performance more broadly.

We summarize these new fields in the table below. These fields are all available in the Edge Platform for users to query on.

The data on delinquencies and forbearance plans covers March 2021 only, which we summarize below, first by cohort and then by major servicer. Edge users can generate other cuts using these new filters or by running the “Expanded Output” for the March 2021 factor date.

In the first table, we show loan-level delinquency for each “Assistance Plan.” Approximately 3.5% of the outstanding GSE universe is in some kind of Assistance Plan.

In the following table, we summarize delinquency by coupon and vintage for 30yr TBA-eligible pools. Similar to delinquencies in GNMA, recent-vintage 3.5% and 4.5% carry the largest delinquency load.

Many of the loans that are 90-day and 120+-day delinquent also carry a payment forbearance. Edge users can simultaneously filter for 90+-day delinquency and forbearance status to quantify the amount of seriously delinquent loans that also carry a forbearance versus loans with no workout plan.[2]  Finally, we summarize delinquencies by servicer. Notably, Lakeview and Wells leads major servicers with 3.5% and 3.3% of their loans 120+-day delinquent, respectively. Similar to the cohort analysis above, many of these seriously delinquent loans are also in forbearance. A summary is available on request.

In addition to delinquency, the Enterprises provide other novel performance data, including a loan’s total payment deferral amount. The GSEs started providing this data in December, and we now have sufficient data to start to observing prepayment behavior for different levels of deferral amounts. Not surprisingly, loans with a payment deferral prepay more slowly than loans with no deferral, after controlling for age, loan balance, LTV, and FICO. When fully in the money, loans with a deferral paid 10-13 CPR slower than comparable loans.

Next, we separate loans by the amount of payment deferral they have. After grouping loans by their percentage deferral amount, we observe that deferral amount produces a non-linear response to prepayment behavior, holding other borrower attributes constant.

Loans with deferral amounts less than 2% of their UPB showed almost no prepayment protection when deep in-the-money.[3] Loans between 2% and 4% deferral offered 10-15 CPR protection, and loans with 4-6% of UPB in deferral offered a 40 CPR slowdown.

Note that as deferral amount increases, the data points with lower refi incentive disappear. Since deferral data has existed for only the past few months, when 30yr primary rates were in a tight range near 2.75%, that implies that higher-deferral loans also have higher note rates. In this analysis, we filtered for loans that were no older than 48 months, meaning that loans with the biggest slowdown were typically 2017-2018 vintage 3.5s through 4.5s.

Many of the loans with P&I deferral are also in a forbearance plan. Once in forbearance, these large deferrals may act to limit refinancings, as interest does not accrue on the forborne amount. Refinancing would require this amount to be repaid and rolled into the new loan amount, thus increasing the amount on which the borrower is incurring interest charges. A significantly lower interest rate may make refinancing advantageous to the borrower anyway, but the extra interest on the previously forborne amount will be a drag on the refi savings.

Deferral and forbearance rates vary widely from servicer to servicer. For example, about a third of seriously delinquent loans serviced by New Residential and Matrix had no forbearance plan, whereas more than 95% of such loans serviced by Quicken loans were in a forbearance plan. This matters because loans without a forbearance plan may ultimately be more subject to repurchase and modification, leading to a rise in involuntary prepayments on this subset of loans.

As the economy recovers and borrowers increasingly resolve deferred payments, tracking behavior due to forbearance and other workout programs will help investors better estimate prepayment risk, both due to slower prepays as well as possible future upticks in buyouts of delinquent loans.


Contact us if you are interested in seeing variations on this theme. Using Edge, we can examine any loan characteristic and generate a S-curve, aging curve, or time series.




[1] A link to the Deferral Amount announcement can be found here, and a link to the Forbearance and Delinquency announcement can be found here. Freddie Mac offers a helpful FAQ here on the programs.

[2] Contact RiskSpan for details on how to run this query.

[3] For context, a payment deferral of 2% represents roughly 5 months of missed P&I payments on a 3% 30yr mortgage.


Flood Insurance Changes: What Mortgage Investors Need to Know

Major changes are coming to FEMA’s National Flood Insurance Program on April 1st2021, the impacts of which will reverberate throughout real estate, mortgage, and structured finance markets in a variety of ways. 

For years, the way the NFIP has managed flood insurance in the United States has been the subject of intense scrutiny and debateCompounding the underlying moral hazard issues raised by the fact that taxpayers are subsidizing homeowners who knowingly move into flood-prone areas is the reality that the insurance premiums paid by these homeowners collectively are nowhere near sufficient to cover the actual risks faced by properties in existing flood zones. 

Climate change is only exacerbating the gap between risk and premiums. According to research released this week by First Street Foundation, the true economic risk is 3.7 times higher than the level at which the NFIP is currently pricing flood insurance. And premiums would need to increase by 7 times to cover the expected economic risk in 2051. 

New York Times article this week addresses some of the challenges (political and otherwise) a sudden increase in flood insurance premiums would create. These include existing homeowners no longer being able to afford the higher monthly payments as well as a potential drop in property values in high-risk areas as the cost of appropriately priced flood insurance is priced in. These risks are also of concern to mortgage investors who obviously have little interest in seeing sudden declines in the value of properties that secure the mortgages they own. 

Notwithstanding these risks, the NFIP recognizes that the disparity between true risk and actual premiums cannot continue to go unaddressed. The resulting adjustment to the way in which the NFIP will calculate premiums – called Risk Rating 2.0  will reflect a policy of phasing out subsidies (wherein lower-risk dwellings absorb the cost of those in the highest-risk areas) and tying premiums to thactual flood risk of a given structure. 

Phase-In 

The specific changes to be announced on April 1st will go into effect on October 1st, 2021. But the resulting premium increases will not happen all at once. Annual limits currently restrict how fast premiums can increase for primary residences, ranging from 5%-18% per year. (Non-primary residences have a cap of 25%). FEMA has not provided much guidance on how these caps will apply under Risk Rating 2.0 other than to say that all properties will be on a glide path to actuarial rates.” The caps, however, are statutory and would require an act of Congress to change. And Members of Congress have shown reluctance in the past to saddle their constituents with premium spikes. 

Phasing in premium increases helps address the issue of affordability for current homeowners. This is equally important to investors who hold these existing homeowners’ mortgages. It does not however, address the specter of significant property value declines because the sale of the home has historically caused the new, fully priced premium to take effect for the next homeowner. It has been suggested that FEMA could blunt this problem by tying insurance premiums to properties rather than to homeowners. This would enable the annual limits on price increases to remain in effect even if the house is sold. 

Flood Zones & Premiums 

Despite a widely held belief that flood zone maps are out of date and that climate change is hastening the need to redraw them, Risk Rating 2.0 will reportedly apply only to homes located in floodplains as currently defined. Premium calculations, however, will focus on the geographical and structural features of a particular home, including foundation type and replacement cost, rather than on a property’s location within a flood zone.  

The Congressional Research Service’s paper detailing Risk Rating 2.0 acknowledges that premiums are likely to go up for many properties that are currently benefiting from subsidies. The paper emphasizes that it is not in FEMA’s authority to provide affordability programs and that this is a job for Congress as they consider changes to the NFIP. 

“FEMA does not currently have the authority to implement an affordability program, nor does FEMA’s current rate structure provide the funding required to support an affordability program. However, affordability provisions were included in the three bills which were introduced in the 116th Congress for long-term reauthorization of the NFIP: the National Flood Insurance Program Reauthorization Act of 2019 (H.R. 3167), and the National Flood Insurance Program Reauthorization and Reform Act of 2019 (S. 2187) and its companion bill in the House, H.R. 3872. As Congress considers a long-term reauthorization of the NFIP, a central question may be who should bear the costs of floodplain occupancy in the future and how to address the concerns of constituents facing increases in flood insurance premiums.” 

Implications for Homeowners and Mortgage Investors 

FEMA is clearly signaling that NFIP premium increases are coming. Any increases to insurance premiums will impact the value of affected homes in much the same way as rising interest rates. Both drive prices down by increasing monthly payments and thus reducing the purchasing power of would-be buyers. The difference, however, is that while interest rates affect the entire housing market, this change will be felt most acutely by owners of properties in FEMA’s Special Flood Hazard Areas that require insurance. The severity of these impacts will clearly be related to the magnitude of the premium increases, whether increase caps will be applied to properties as well as owners, and the manner in which these premiums get baked into sales prices. 

Mortgage risk holders need to be ready to assess their exposure to these flood zone properties and the areas that see the biggest rate jumps. The simplest way to do this is through HPI scenarios based on a consistent view of the ‘affordability’ of the house  i.e., by adjusting the maximum mortgage payment for a property downward to compensate for the premium increase and then solving for the drag on home price.


Get in touch with us for a no-obligation discussion on how to measure the impact of these forthcoming changes on your portfolio. We’d be interested in hearing your insights as well. 


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