‘Modest uptick’ in mortgage delinquencies predicted

Global ratings agency Moody’s said it expects to see a “modest uptick” in delinquencies on residential mortgage-backed securities (RMBS) in the coming quarters, noting that the arrears rate was low in the first half of 2019. 

The prediction is based on high levels of household debt, “moderating” house prices, and the large number of interest-only home loans being converted to principal and interest loans by the end of 2020.

While these factors will “weaken” the performance of RMBS in Australia, Moody’s analyst Jacqui Dredge noted that the impact will be “limited” due to “stable” GDP growth, low unemployment and interest rate cuts made by a long line of lenders off the back of the Reserve Bank’s move to drop the official cash rate to the new historic low of 1 per cent.

Ms Dredge also noted a report that recent developments, such as APRA removing the minimum 7 per cent interest rate floor requirement, is “credit negative for new RMBS”. 

“It will allow home buyers to borrow larger amounts, thereby increasing the risk of mortgage defaults and losses,” the analyst wrote. 

“However, the increased borrowing power of home buyers will support house prices and give existing borrowers more refinancing options, which will reduce the risk of losses in outstanding RMBS.”

RMBS issuances totalled $18.3 billion across 20 transactions in the first half of 2019, compared to $27.7 billion across 35 deals in full-year 2018, according to Moody’s. 

Non-bank lenders issued 13 RMBS transactions in H1 2019, accounting for 51.6 per cent of the volume of total issuances during that period, while regional banks issued five deals, accounting for 23.9 per cent of issuances.

Westpac and ANZ were the only major banks to issue new RMBS in H1 2019. These two transactions accounted for a combined 24.6 per cent of total issuance volume for the period.

The ratings agency said delinquencies and losses on residential mortgages remained low in H1 2019, though performance varied from state to state.

“Mortgage performance in Western Australia and regional Queensland [has come] under the most pressure following the slowdown in the mining sector. Mortgage performance in bigger and more diversified economies such as New South Wales and Victoria was the strongest,” Ms Dredge wrote. 

According to Moody’s, the value of new residential mortgages reached $345 billion in the 12 months to March 2019, down 9.7 per cent from the previous year. 

The value of outstanding mortgage was $1.67 trillion at the end of March 2019, up 4.2 per cent from March 2018. 

Interest-only loans accounted for 15.9 per cent of all new residential mortgage approvals in the year to June 2019, down nearly 4 percentage points from 19.8 per cent in the previous 12 months, and “significantly” lower than the peak reached before APRA introduced measures to limit growth in interest-only loans. 

Meanwhile, owner-occupier loans accounted for 69.8 per cent of all new residential mortgage approvals over the year to June 2019, while investment loans accounted for the remaining 30.2 per cent.

[Related: RBA lauds ‘effective’ tightening of lending standards]