Guy Debelle Assistant Governor (Financial Markets), spoke at the 28th Australasian Finance and Banking Conference – “Some Effects of the New Liquidity Regime“. During his speech he revealed some significant data drawn from Australian securitised mortgages. With the caveat that securitised loans are somewhat cherry-picked, and may not represent the entire market profile, there are some interesting observations. Of note is the higher level of default in WA, and the proportion of loans above 80% and 90% LVR.
To enhance the information available to us, since the middle of 2015, mandatory reporting requirements came into effect for asset-backed securities to be repo eligible with the Reserve Bank and also to be eligible collateral for the CLF.
The required information includes key transactional level data, detailed tranche information, and the relationships between trusts and service providers including who is providing various facilities such as a fixed to floating swap. At the loan level, required data for RMBS include: 62 loan fields such as loan balances, interest rates, arrears measures; 18 borrower fields such as borrower income, employment type, whether they are an investor or owner-occupier, whether they are a first home-buyer; and 13 collateral fields (that is, detail on the collateral underpinning the mortgage) including postcode and property valuation.
These requirements include data that are commonly used by ratings agencies and RMBS investors, but the data go beyond that to also include some useful information that has not been commonly compiled before, such as offset balances and borrower income at origination. This allows us, along with other investors in asset-backed securities, to undertake a richer analysis of such securities and more accurately assess their risk and pricing than may have been possible before. In our case, it allows us to undertake our own risk assessment and not be dependent on rating agencies.
In addition to these data fields, issuers are also required to provide a working cash flow waterfall model of the security which can provide useful information about structural aspects of ABS in some cases only previously obtainable through a detailed reading of legal documentation. This innovation has been very useful in standardising information across securities, allowing us to verify structural features of deals and provide more granular haircuts and pricing than was the case previously.
These reporting requirements are standardised for all repo-eligible asset-backed securities, meaning that the same information is required for all securities. As a result, going forward, it will be easier to compare securities. We see this as being of great benefit to the industry as a whole, as does the industry itself, as evidenced by the support of the Australian Securitisation Forum (ASF) through the whole process of introducing these new standards.
The repo-eligibility requirements also direct issuers to make the information available to investors and other permitted users, not just to the Reserve Bank. By and large, the information provided to these groups is the same as that provided to the Reserve Bank; however, there have been some fields where the information provided posed a potential risk to privacy. Hence issuers may redact some particular fields and provide aggregated de-individualised data about these fields instead.
Since the middle of this year, we have received into our securitisation system around 1 600 submissions, covering around $400 billion in assets, including around two million individual housing loans. The information is updated on a monthly frequency so we are gaining not only a much richer view of the ABS market at any point in time, but also a rich time series. With this very large panel data set we can examine how the market, and the underlying collateral, evolves through time.
With the caveat that the data reporting is still in its infancy, it’s already apparent that there are many potential benefits of the data. Let me illustrate some of the summary information that we can glean from the first few months of reporting. As noted earlier, these data cover around 2 million housing loans of the total of the approximately 6 million such loans on issue currently.
Graph 4 shows the loan to value ratio (LVR) at origination and currently. The largest share of loans had an LVR at origination of between 70 and 80 per cent. While that is still the case in terms of the current LVR, the share is noticeably lower. Similarly, there are almost no loans with an LVR greater than 90 per cent, even though around nearly 10 per cent had an LVR greater than 90 at origination. That said, it should be borne in mind that securitised loans tend to be more seasoned than non-securitised loans and are therefore amortising more quickly. The seasoning (time since loan origination) of the securitised loans is shown in Graph 5. It shows that 95 per cent of the value of loans is more than one year old, and nearly 75 per cent is more than three years old.
Graph 4
Graph 5
One issue which is of some interest currently is the extent of the repayment buffer that has been built up by borrowers. This is shown in Graph 6 which shows that two-thirds of borrowing is covered by a repayment buffer of at least one month’s worth of required mortgage payments, and for half of this, that buffer is more than one year. As the time series on this loan feature accumulates it has the potential to be useful information for monetary policy as well as financial stability considerations. Graph 7 shows the level of documentation for loans securitised by different types of lender. It shows that the major banks have a minimal share of low doc loans in their pools, whereas for the non-bank issuers the share is considerably larger.
Graph 6
Graph 7
Finally, in terms of credit risks, Graph 8 shows arrears rates by states and shows that the current distribution of arrears are consistent with the variation in economic conditions across the states, though at the same time all arrears rates are relatively low.
Graph 8
Of course, credit risk is not so much about the averages but the distributions. Having the loan level data enables an insight into the characteristics of the loans in the various tails of the distribution that warrant closer attention. It will also allow an assessment of the correlations between the various drivers of risk that may lead to credit deterioration.
In sum, there is very rich potential in these data for many purposes for the RBA and other market participants. From our point of view, the data provide us with a great deal of insight into the contingent risk that might at some point reside on our balance sheet. But clearly, the data are also very useful for financial stability and monetary policy considerations too.
