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Arrears ‘above average’ but falling: S&P

Delinquencies underlying Australia’s prime residential mortgages have dropped but remained higher than the historical average, according to Standard & Poor’s.

The latest arrears statistics from ratings agency Standard & Poor’s (S&P) has revealed that loans over 30 days in arrears, which underlie Australia’s prime residential mortgage-backed securities (RMBS), dropped from 1.36 per cent in August to 1.33 per cent in September.

S&P noted that arrears “typically fall at this point in the annual cycle”, but added that the current arrears level of 1.33 per cent is above the 1.17 per cent historical average for September.

The fall in arrears was reported in all states and territories except Victoria, where delinquencies increased from 1.16 per cent to 1.18 per cent over the same period.

According to the S&P data, arrears remain highest in Western Australia (2.56 per cent), followed by the Northern Territory (2.33 per cent), Queensland (1.67 per cent), South Australia (1.39 per cent), Tasmania (1.26 per cent), Victoria (1.18 per cent), NSW (1.08 per cent), and the ACT (0.82 per cent).

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Reflecting on the figures, S&P observed that arrears were “holding steady” amid “declining property prices”.

“This is in line with our expectations, given employment conditions are generally positive, interest rates are low and lending competition remains strong for borrowers of good credit quality,” S&P noted.

“This bodes well for the Australian RMBS sector, because most loans are well seasoned, and amortizing loans have built up equity.”

However, the ratings agency warned that loan originated over the past 12 months are “more at risk” than seasoned loans.  

S&P added that depending on the loan-to-value ratio (LVR) of the loans at origination, borrowers can be “more susceptible to the risk of a market value decline” and could have “diminished refinancing prospects in the current lending environment”.

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The ratings agency noted that loans with an LVR of more than 80 per cent make up approximately 13 per cent of Australia’s overall mortgage portfolio.

Further, the S&P data revealed that both investor and owner-occupier arrears declined in September.

Investor arrears dropped to 1.19 per cent in September from 1.23 per cent in August, while owner-occupier arrears fell to 1.52 per cent from 1.53 per cent over the same period.

“Investment arrears have been lower than owner-occupier arrears for the past nine years, a period of relatively benign economic conditions,” the ratings agency stated.

However, S&P highlighted that investor arrears were higher than owner-occupier arrears during the global financial crisis.

“This illustrates the greater sensitivity of these types of loans, which are of a more speculative nature, to a general decline in economic conditions,” S&P continued.

“During more benign economic conditions, investors have been more impervious to interest-rate rises than owner-occupiers, reflecting their generally higher net wealth position.”

According to the S&P data, non-conforming mortgages “bucked the general trend” in September, with loans more than 30 days in arrears rising to 3.01 per cent from 2.84 per cent in August.

[Related: CCR could be a ‘gold standard’ for credit risk]

Arrears ‘above average’ but falling: S&P
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