Prime RMBS arrears up: S&P

The number of delinquent mortgages underlying Australian prime residential mortgage-backed securities rose to 1.17 per cent in July from 1.15 per cent in June, according to a recent report by S&P.

The credit rating agency said the rise in mortgage delinquencies was partly influenced by a fall in outstanding loan balances during July. Prime RMBS arrears were up 0.01 per cent year-on-year, but remained below the July average for the past 10 years of 1.25 per cent because of continued jobs growth and unemployment holding steady.

S&P found that delinquent repayments on the loans underlying major banks' prime RMBS - which make up almost half of all such loans outstanding - rose to 1.11 per cent in July from 1.08 per cent in June.

Regional banks' prime RMBS arrears also climbed to 2.35 per cent in July from 2.30 per cent in June and the ‘other banks’ category recorded an increase to 0.99 per cent from 0.94 per cent a month earlier, albeit off declining loan balances.

State by State

Conversely, non-bank RMBS arrears fell to 0.47 per cent from 0.49 per cent the previous month and non-bank originator RMBS arrears fell to 0.85 per cent from 0.88 per cent in June.

“The pronounced improvement in non-bank originator prime RMBS arrears since their peak of 2.99 per cent in January 2009 reflects a general improvement in the overall collateral quality of this sector,” S&P said. “This is evidenced by a fall in low documentation loans from 22 per cent in December 2009 to 15 per cent in June 2017 across their prime portfolios."

Higher loan-to-value ratio loans - those exceeding 75 per cent - in this sector have declined to 28 per cent as of July 2017, from around 50 per cent in 2009. Home loan arrears increased in July in New South Wales, Victoria, Western Australia, Tasmania and the Northern Territory.

Queensland and South Australia were the only states where arrears fell month on month, with Queensland falling to 1.60 per cent from 1.62 per cent and South Australia falling to 1.46 per cent from 1.51 per cent, against a backdrop of increasing loan balances.

Interestingly, South Australia and Queensland recorded the largest improvement in their unemployment rates in August. Unemployment fell in both states to 5.7 per cent in August from 6.2 per cent in July in seasonally-adjusted terms.

The biggest increase in the seasonally-adjusted unemployment rate was in Western Australia, where it rose 0.5 percentage point to 5.9 per cent. New South Wales in August retained the nation's lowest seasonally-adjusted unemployment rate of 5.0 per cent.

Non-conforming arrears

Non-conforming arrears fell to 4.80 per cent in July from 4.84 per cent in June, despite falling loan balances. Non-conforming loans more than 90 days past due rose to 2.26 per cent in July from 2.20 percent the previous month.

Such loans make up around 47 per cent of total non-conforming arrears, compared with 58 per cent for prime RMBS arrears.

“The improvement in non-conforming arrears during the past 10 years reflects a similar improvement in the collateral quality of non-bank originators' prime RMBS portfolios, with a noticeable reduction in low-documentation and higher LTV loans," said S&P.

“Arrears for loans underlying prime and non-conforming RMBS portfolios are holding steady. With continued jobs growth and unemployment rates remaining relatively stable, we expect this trend to continue."

Stable employment conditions and low interest rates are undoubtedly supporting the low arrears levels in most Australian RMBS transactions.

"High household debt and stagnant wage growth increase more borrowers' sensitivity to a change in economic conditions, but we do not expect the loans underlying Australian RMBS transactions to deteriorate in the short to medium term while stable employment conditions persist."

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