Innovative Mortgage Risk Indexes Herald New Era for Lenders
Introduction to New Mortgage Risk Indexes
The Smith Enterprise Risk Consortium (SERC) at the University of Maryland's Robert H. Smith School of Business has announced the introduction of two groundbreaking mortgage credit risk indexes. These tools are designed to help lenders, servicers, credit investors, and regulators gauge shifts in the credit risk associated with mortgages that qualify under government-sponsored enterprises (GSEs).
Understanding the Mortgage Credit Risk Index (MCRI)
The first index, the Mortgage Credit Risk Index (MCRI), evaluates the anticipated default risk over a 3-5 year period for specific loans. Each data point collected is aggregated quarterly for loans sold to Freddie Mac and Fannie Mae. The MCRI operates on an interesting scale of 300 to 900, where a higher score indicates increased credit risk. Notably, every increment of 40 points in the MCRI score doubles the default odds, providing a clear metric for assessing loan risk.
Importance of MCRI in the Mortgage Landscape
With mortgages representing a significant sector of household debt—approximately $13 trillion—and accounting for around 70% of total household liabilities, understanding the trajectory of mortgage credit risk is vital for a stable economy. Expert Clifford Rossi emphasizes that keeping an eye on mortgage credit trends is essential for economic health.
Exploring the Mortgage Redtail Risk Index (MRRI)
Complementing the MCRI, the Mortgage Redtail Risk Index (MRRI) explores risk layering and potential adverse selection among loans sold to GSEs. The MRRI particularly focuses on the presence of significant risk factors such as low credit scores, high loan-to-value ratios, and high debt-to-income ratios. While the MCRI evaluates the overall credit risk of newly originated loans, the MRRI sheds light on the specific risk factors percolating within the highest-risk loans.
Algorithmical Foundations of the Indexes
Developed in collaboration with graduate students from Smith's Master of Quantitative Finance program, both indexes utilize proprietary algorithms powered by advanced machine learning technologies, alongside established mortgage credit risk analytics. Rossi noted that the development draws from an extensive dataset comprising four million GSE-eligible loans originating between 2000 and 2018, assessing their performance right up to the present quarter.
Future Updates and Availability
SERC plans to refresh both indexes on a quarterly basis as GSEs release new datasets, ensuring that users have the most current and relevant information to inform their decisions. Interested users can access these indexes through dedicated requests, thereby adding substantial value to their advisory and operational functions.
About the Robert H. Smith School of Business
Renowned for its excellence in management education and research, the Robert H. Smith School of Business at the University of Maryland offers a variety of programs including undergraduate degrees, MBA options (full-time and flex), executive and online MBAs, business master’s, and doctoral programs. Moreover, it fosters connections with businesses across North America and Asia, enhancing the educational experience through real-world applications.
Contact Information
For further inquiries, Greg Muraski is available for contact, providing opportunities for communication and information sharing with interested parties.
Frequently Asked Questions
What are the new mortgage risk indexes introduced by SERC?
The Mortgage Credit Risk Index (MCRI) and Mortgage Redtail Risk Index (MRRI) help assess credit risks associated with mortgages eligible for GSEs.
How does the MCRI measure mortgage risk?
The MCRI predicts default risk over a 3-5 year period, providing a score range that correlates higher scores with increased risk.
Who developed the mortgage risk indexes?
Clifford Rossi led the development of the indexes with the assistance of graduate students from the Master of Quantitative Finance program.
How frequently will the indexes be updated?
The MCRI and MRRI will be updated quarterly based on the latest data from the GSEs.
How can one access the mortgage risk indexes?
Individuals can request access to the indexes, with further details about obtaining this information made available through SERC's resources.
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