Mortgage bonds safe from property downturn: S&P

A 20 per cent drop in property values would only affect a small portion of AAA prime residential mortgage-backed securities (RMBS), according to Standard & Poor’s.

Against a backdrop of increasing household debt and a prolonged period of low interest rates, the credit ratings agency said there is growing concern over households’ vulnerability to a decline in property prices.

“Falling property prices increase financial losses for borrowers in financial difficulty and are a key consideration for Australian prime RMBS,” it said.

S&P said subordinated classes of notes in RMBS that rely on lender's mortgage insurance (LMI) and excess spread to cover losses would be more sensitive to price movements if LMI providers were to simultaneously increase claims adjustments.

“We have observed that most Australian lenders have aligned their practices closely to the requirements of LMI providers, and promptly adjust their practices when they uncover gaps,” it said.

“As a result, we expect incidences of claims denials to remain negligible and increases in claims adjustments to be contained.

“The loss experiences and subsequent claims adjustments in the context of RMBS have been low to date, and risk mitigants such as excess spread have been more than sufficient to cover transaction exposures to such risks.”

[Related: RMBS and ABS defaults to rise]

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