Interesting release from Moody’s today on securitisation of non-conforming loans in Australia. Non-conforming loans are defined those who fall outside normal credit approval criteria, for example because of a negative credit history, or because borrowers provided limited verification of their financial situation, or required an abnormally large loan, and as a result they do not meet the standard underwriting criteria of prime lenders and lenders mortgage insurance providers.
In the analysis today of the APRA data we highlighted a rise in non-standard approvals.
Moody’s calculate that some 7% of all Retail Mortgage Backed Ssecurities (RBMS) were backed by non-conforming loans but says the underwriting standards and overall quality of borrowers in Australian non-conforming residential mortgage backed securities (RMBS) portfolios after the global financial crisis in 2008-09 are better than in comparable transactions in the Australian market before the financial crisis, and better than in subprime transactions in the US and UK written pre-2008. Moody’s report says that currently, all Australian mortgage portfolios, including non-conforming RMBS are performing strongly, supported by the country’s low interest rate environment, stable economy and continued house price appreciation.
As we highlighted recently, overall securitisation is well below pre-GFC levels.
Moody’s says:
In contrast to the US subprime, US Alt-A, and UK non-conforming RMBS issued pre-2008, Australian non-conforming RMBS did not experience a significant rise in delinquencies and defaults after the financial crisis, because Australia did not suffer the severe economic stress and house price declines that affected the US and UK markets from 2007 onwards. Moody’s report says that while there are many common elements between Australian non-prime loans, and pre-2008 UK and US mortgages granted to borrowers who did not meet the traditional prime lending criteria, current market practices and legislation in Australia have put strict constraints on lenders, such that the average quality of borrowers in Australia is better than in typical pre-2008 UK non-conforming, US subprime or US Alt-A portfolios.
According to Moody’s report, Australia’s non-conforming RMBS market re-emerged in 2013, after stalling as a result of the global financial crisis. Over the last 18 months, 10 new transactions totaling AUD3.0 billion have been issued, including USD200 million in USD denominated issuance from Australian originators.
Moreover, while competition has been strong among non-conforming lenders in Australia post-2008, there has been no evidence of a loosening of underwriting standards to gain customers. Instead, lenders have focused on price to attract borrowers.
