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RMBS and ABS defaults to rise, covered bonds strong

The delinquency and default rates for Australian residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) will rise slightly in 2016, according to Moody’s Investors Service.

Jennifer Wu, associate managing director at Moody’s, said the credit quality of the mortgage collateral for new RMBS issued in 2016 will deteriorate compared to this year due to an increase in riskier housing investment and interest-only loans, as well as mortgages originated during a period of low interest rates and rapidly rising house prices.

“We also expect more RMBS deals to reduce their dependence on lenders mortgage insurance policies in 2016,” Ms Wu added.

“At the same time, ABS delinquencies and defaults will rise slightly but remain at low levels in 2016, with overall performance to stay stable, supported by low interest rates.”

Moody’s said the credit quality of Australian and New Zealand covered bonds will remain strong in 2016 due to the strong and stable financial standing of issuers, as well as the strong and stable sovereign credit quality of both countries.

However, the group noted that although the quality of mortgages in covered pools will weaken slightly next year, issuers have abundant capacity to enhance the cover pools if needed.

[Related: Banks' asset quality has peaked, says Moody's]

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