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 Read More.. https://riskspan.com/riskspan-vqi-current-underwriting-standards-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.