Back book rate hikes spur arrears jump: S&P

The latest RMBS Performance Watch: Australia report from S&P Global Ratings has revealed that in the 12 months to September 2018, arrears over 30 days, which underlie Australia’s prime residential mortgage-backed securities (RMBS), increased by 25 basis points, from 1.08 per cent to 1.33 per cent.

S&P has attributed the rise in delinquent loans to out-of-cycle interest rate increases on lenders’ back books and increasingly challenging refinancing conditions.  

However, the ratings agency said that “strong employment conditions” and “more optimistic wage growth data” have helped offset the impacts of higher interest rates and tighter refinancing conditions.

S&P also claimed that with interest rates “more likely to go up than down”, borrowers could experience debt-serviceability pressures in the coming months.

However, S&P expects most mortgage holders to absorb such pressures.

“We believe most of the borrowers in Australian prime RMBS portfolios should be able to absorb a gradual rise in interest rates,” the ratings agency noted.

“Borrowers with seasoned loans, which make up the majority of most transactions outstanding, have a demonstrated repayment track record.”

“Meanwhile, loans originated in recent years do not have the benefit of seasoning but have been underwritten during a period of tightened underwriting criteria and subject to debt-serviceability calculations that include interest-rate buffers and floors.”

S&P claimed that less-seasoned loans with higher loan-to-value ratios (LVRs) are most likely to experience higher arrears.

Further, the ratings agency added that it expects falling property prices to “erode borrowers’ equity in their home loans” but stated that it would come off the back of “several years of strong, uninterrupted property price growth for many seasoned loans”.

“While property price declines will increase loss severity in the event of borrower foreclosure, borrower default behaviour is predominantly influenced by affordability considerations.

“Defaults in Australia historically have been influenced by triggers such as unemployment, divorce and health-related issues.”

S&P concluded: “Labour market conditions therefore are fundamental to stable collateral performance and ratings stability.”

[Related: Arrears ‘above average’ but falling]