Non-bank mortgage originators have recorded the greatest improvement in arrears over the last five years while the quality of major bank home loans has deteriorated in recent months, according to S&P.
The number of delinquent housing loans underlying Australian prime RMBS increased in October from the previous month, according to a recent report by S&P Global Ratings.
It was the second consecutive month in which mortgage delinquencies bucked the cyclical trend of falling arrears between April and November.
A total of 1.16 per cent of the mortgages underlying Australian prime RMBS were more than 30 days in arrears in October, as measured by Standard & Poor's Performance Index (SPIN), up 2 basis points from September. It was the first month-on-month increase in October since 2011, when arrears and interest rates were at higher levels.
S&P found that mortgage delinquencies are up year-on-year, however, the agency noted that 2015 and 2014 were a period of historically-low arrears.
“Arrears were below 1 per cent during the third and fourth quarters of 2015; a level not seen since 2005,” the report said.
“However, arrears now have started to rise, even while interest rates remain low and the unemployment rate is relatively stable. While arrears remain below their peak and 10-year average, mortgage stress is apparent in parts of the country.”
The SPIN for non-conforming loans meanwhile fell in October to 3.99 per cent, its second-lowest level, from 4.36 per cent in September.
S&P said the decline is partly due to an increase in loan balances outstanding, but the overall improvement during the past four years reflects the better collateral quality of non-conforming portfolios with a greater proportion of full-documentation loans and near-prime loans in current outstanding non-conforming transactions.
Arrears increased month-on-month in October for most originator categories except regional banks, which recorded a decline to 1.85 per cent from 1.87 per cent in September.
Non-banks continued to have the lowest arrears at 0.69 per cent, followed by other banks, at 0.98 per cent, and non-bank originators, at 1.07 per cent.
Major bank arrears increased to 1.14 per cent in October from 1.11 per cent in September.
According to S&P, non-bank originators have recorded the greatest improvement in arrears during the past five years, falling 60 per cent from a five-year peak of 2.67 per cent to 1.07 per cent in October, despite falling loan balances.
Loans more than 90 days overdue at major banks accounted for more than 48 per cent of their total arrears in October, up from around 40 per cent a year earlier. This was the largest movement in the advanced arrears category.
“The markets currently expect increases in mortgage rates, and we believe this would result in an increase in home loan arrears because most of the loans underlying Australian RMBS portfolios are variable rate,” the S&P report said.
[Related: RMBS arrears and defaults to rise: Moody's]