Burgeoning competition a risk to credit quality: S&P

According to S&P Global Ratings’ director of structured finance, Erin Kitson, burgeoning competition in the mortgage market, driven by Australia’s open banking and comprehensive credit regime (CCR) could undermine quality of the residential mortgage-backed securities (RMBS).

Ms Kitson said that the race among lenders to consolidate and expand market share could lead to less diligent credit practices, particularly if much of the mortgage growth is originated in the non-bank sector.

“In Australia, we’re on the dawn of the comprehensive credit regime and the open banking inquiry, which would obviously open the door for more competition in the financial services space,” Ms Kitson said.

“What we’re increasingly going to see is much faster credit decision-making, which will expedite loan volumes.

“In these types of conditions, that could lead to a deterioration in lending standards, particularly if a lot of that competition is occurring in the more unregulated sector.”

Ms Kitson said that non-banks have “capitalised” on the reduced appetite of established banks for certain types of lending, including from self-managed super fund (SMSF), interest-only and investor borrowers, which she said is evidenced by the non-banks’ “less-seasoned’” portfolios.

“I suppose one of the more telling impacts of the stronger growth in lending from [the non-bank] sector has been the contraction in seasoning across non-bank portfolios, where we’ve seen portfolios originated this year, with as low as six months seasoning, which has tightened up from the last few years where, typically, transactions have had between 12 and 24 months seasoning at deal close,” she added.  

However, Ms Kitson warned that with property prices falling, less seasoned loans originated at the peak of the housing boom, particularly those with high loan-to-value ratios (LVRs), may be at risk of falling into negative equity and sparking a rise in arrears.

The S&P director of structured finance also noted the risks associated with the transition of interest-only loans to principal and interest.

“Across RMBS portfolios, probably around 50 per cent of the interest-only loans would reach their interest-only maturity date at the end of 2019. 

“This transition has been occurring over the past few years; it has certainly put pressure on arrears but not significantly increased arrears.”

S&P recently released its latest arrears data, which revealed that while delinquencies underlying Australia’s RMBS sector declined from 1.36 per cent in August to 1.33 per cent in September, arrears remain above the “historical average”.

[Related: Arrears ‘above average’ but falling: S&P]