Australia’s RBMS mortgage arrears fell to 1.02% in 3Q17, a 15bp decrease from the previous quarter; consistent with the nine-year long seasonal trend where 30+ days arrears have eased in the third quarter. Fitch Ratings believes the curing of third-quarter arrears was helped by borrowers using tax return receipts to make repayments.
The 30+ days arrears were 4bp lower than in 3Q16, reflecting Australia’s improved economic environment and lower standard variable interest rates for owner-occupied lending. Unemployment improved by 10bp and real wage growth, although low, was positive. Underemployment has continued to improve, reflecting an increase in available work for underemployed workers.
Prepayment rates remained low during 2017, with the conditional prepayment rate (CPR) staying below 20% for three consecutive quarters; the longest period this rate has remained below 20% since 2011. The CPR increased slightly qoq to 19.6%, from 19.1%, while the Dinkum RMBS Index borrower payment rate increased to 21.6% qoq, from 21.2%.
The gap between investor lending and owner-occupied rates has widened, as authorised deposit-taking institutions respond to regulatory investment and interest-only limits on new loan origination. Historically, investors paid a 25bp-30bp premium over owner-occupied loans, but this widened to 60bp in September 2017.
Losses experienced after the sale of collateral property remained extremely low, with lenders’ mortgage insurance payments and excess spread sufficient to cover principal shortfalls in all transactions during the quarter.
Fitch’s Dinkum RMBS Index tracks arrears and the performance of mortgages underlying Australian residential mortgage-backed securities.