Delinquencies spike ahead of deferral program

Moody’s Investors Service has reported that over 30-day delinquency rate underlying Australia’s prime residential mortgage-backed securities (RMBS) increased to 1.79 per cent in the three months to 31 March, up from 1.55 per cent in the December quarter, and from 1.57 per cent in the previous corresponding period.

The major banks recorded the sharpest increase in delinquencies, up from 1.82 per cent to 2.28 per cent quarter-on-quarter, and up 53 bps from 1.75 per cent in the March quarter of 2019.

This was offset by a decline in delinquencies across Australia’s regional banks, down in both quarterly and annual terms to 1.45 per cent.

However, the deterioration in credit quality preceded the rollout of repayment holidays from lenders in response to the COVID-19 crisis, which are exempt from delinquency reporting.

According to the latest available data from the Australian Banking Association (ABA), approximately 430,000 home loan customers have deferred their home loan repayments in response to the COVID-19 crisis – equating to over $150 billion in mortgages.  

Nonetheless, Moody’s vice president and senior credit officer Alena Chen is forecasting an increase in arrears over the coming quarters, in response to the rising unemployment rate.  

“Australia’s unemployment rate increased to 6.2 per cent in April from 5.2 per cent in March, while underemployment increased to 13.7 per cent from 8.8 per cent over the same period, with the stressed economic conditions to constrain borrowers’ ability to make mortgage repayments,” he said.  

Moody’s also noted that it expects Australia’s GDP to contract 2.9 per cent over the course of 2020.

“Government support measures, monetary easing policies and lender relief initiatives will lessen but not eliminate the risk of loan and delinquencies and defaults over 2020,” Mr Chen added.

S&P Global Ratings has also previously forecast a spike in arrears over the next 12 months, particularly upon the expiry of repayment holidays.

“The COVID-19 hardship concessions will assist many borrowers to transition through this period of stress,” the ratings agency added.

“However, while not all of these loans are likely to move to formal arrears management and foreclosure after the hardship period ends, some of them are likely at a higher risk of default.

Moody’s has estimated that between 10 to 20 per cent of lenders’ mortgage portfolios are exposed to COVID-19 hardship assistance.

[Related: Banks will need to change the way they assess risk: Volt CEO]