Arrears on non-conforming loans continue to fall

The latest RMBS Arrears Statistics: Australia report from ratings agency Standard & Poor’s (S&P) has revealed that delinquencies on Australia’s prime residential mortgage-backed securities (RMBS) increased to 1.38 per cent in May, from 1.36 per cent in April.

The sharpest rise in prime mortgage arrears was in the Northern Territory, where delinquencies increased by 52 basis points to 2.84 per cent, followed by Tasmania (6 basis points to 1.36 per cent), Queensland (4 basis points to 1.77 per cent), NSW (2 basis points to 1.05 per cent), South Australia (1 basis point to 1.51 per cent) and the ACT (1 basis point to 0.75 of a percentage point).

Conversely, prime arrears dropped in Victoria by 5 basis points to 1.20 per cent, and in Western Australia by 3 basis points to 2.67 per cent.

Speaking to Mortgage Business, chief economist at AMP Capital Shane Oliver attributed the rise in prime mortgage arrears to the mining boom hangover in Australia’s resource states.

“It seems that arrears are going up on conditional loans made seven years ago in areas benefitting at the time from the mining boom — in Western Australia, parts of Queensland and the Northern Territory,” Mr Oliver said.

“Those areas now are among the weakest in the economy, and of course, that’s showing up in arrears.”

While delinquencies on prime residential mortgages rose, arrears on non-conforming mortgages dropped for the third consecutive month, falling to a historic May low of 3.65 per cent, down from 3.86 per cent in April.

Mr Oliver noted that the fall in non-conforming arrears could be attributable to strong jobs growth in NSW and Victoria, where issues of non-conforming loans typically lend.

“The lenders that provided non-conforming loans tended to focus on areas where the borrowers were reasonably secure in terms of their job — NSW and Victoria, in particular,” Mr Oliver said.

“Even though house prices have come off in Melbourne and Sydney, the jobs market in those two cities is still very strong, and so we haven’t really seen any of the pressures that cause arrears for borrowers in those cities and I think that is what’s showing up here.”

When asked if he thinks recent arrears trends have been influenced by an uptake in demand for credit from alternative lenders amid tighter lending standards, Mr Oliver said: “It could be, but I suspect that phenomenon is relatively recent.

“The people who were defaulting probably would have got their loans a few years ago, whereas the shift away from traditional banks towards non-bank lenders is probably a more recent one.

“It’s something that we might start to see more of in a few years when those loans are further down the track, particularly if NSW and Victoria see their economy slow down.”

[Related: Government and industry weigh in on credit curbs]