Arrears fall, rate rises unlikely to affect credit quality: Fitch

According to Fitch Rating’s latest Dinkum RMBS Index, mortgage arrears dropped by 5 basis points to 1.09 per cent in the second quarter of 2018 (2Q18).

Despite the drop, Fitch noted that it expects arrears to remain above 0.8 of a percentage point, “despite Australia’s benign economic environment, due to non-economic factors, such as divorce, illness and extraordinary expenses”.

The ratings agency also reported a rise in the borrower payment rate (BPR), which rose by 2 basis points to 20.9 per cent of RMBS transactions, with the conditional prepayment rate (CPR) also increasing to 18.6 per cent.

However, Fitch stated that prepayment rates remained low in the year to 2Q18, off the back of tighter underwriting standards and macro-prudential caps on investor and interest-only lending.  

“Prepayment rates remained low during 2017 and into 2Q18, with the CPR recording below 20.0 per cent for the entire period, the longest time that the CPR has remained below this level,” Fitch noted.

“Fitch forecasts the CPR to remain below 20.0 per cent during 2018.”

Moreover, the ratings agency reported that the annualised loss rate (defaults) remained stable at 0.02 of a percentage point, continuing the trend of the past three years after peaking at 0.08 of a percentage point in June 2010 and June 2013.

Fitch has said that it expects the trend to continue, despite out-of-cycle interrelated rate hikes from lenders.

“Fitch expects the loss rate to remain low throughout 2018, as we forecast the Reserve Bank of Australia (RBA) to keep the cash rate unchanged at 1.5 per cent for the full year and do not expect the recent out-of-cycle rate hikes from lenders to have any impact,” the ratings agency added.

Further, Fitch’s Dinkum LMI [lenders mortgage insurance] payment ratio remained unchanged at 98.4 per cent of submitted claimed.

Fitch said that it expects the ratio to remain above 95.0 per cent in 2018, “given current housing market and LMI payment trends”.

According to the ratings agency, the average LMI claim was $90,053, above the Dinkum average of $83,464.

Fitch added that it expects the average claim to be between $80,000 and $90,000 in 2018, “depending on house-price volatility”.

Additionally, Fitch’s non-conforming RMBS Index decreased by 2.12 per cent quarter-on-quarter to 5.26 per cent in 2Q18.

The ratings agency said that the index “remains well below record highs in the first quarter of 2009, when non-conforming arrears climbed to 20.9 per cent subset of the mortgage market”.

[Related: RBA flags mortgage serviceability risks]