Mortgage Defaults – Page 6 – Digital Finance Analytics (DFA) Blog

Mortgage arrears go against seasonal trends

Credit rating firm Fitch has described an increase in Australian mortgage arrears over the June 2016 quarter as surprising.

Released this week by Fitch, the latest Dinkum RMBS Index shows mortgage arrears rose 0.4% to 1.14% over the three months to June. On a year-on-year basis, mortgage arrears are 0.6% higher than they were at June 2015.

According to Fitch, the increase in arrears over the June quarter went against seasonal trends, with arrears that originated in the first three months of the year continuing through the quarter.

“The increase… was mainly in the 90+ days bucket, following the migration of the 30-60 days arrears in 1Q16 into longer-dated arrears,” Fitch said in statement.

“Historically, arrears that materialise in the first quarter are due to seasonal spending and tend to cure themselves in the next quarter. However, recent data indicates households that had financial difficulties in 1Q16 also had them in 2Q16,” the statement said.

While Australia’s unemployment levels are falling, Fitch believes increased levels of underemployment are likely behind the arrears increase.

As of the end of Australia’s unemployment rate sat at 5.6%, while the underemployment rate sat at 8.8%. Underemployed workers are defined as part-time workers who want and are available for more hours of work than they currently have and full-time workers who worked part-time hours during the reference week for economic reasons.

While arrears do appear to be increasing, Fitch said there may be some improvement as the impact of the Reserve Bank of Australia’s August rate cut works its way through the market.

“Monetary policy has not significantly benefitted mortgage performance in 2Q16 and lower mortgage rates only marginally helped 30-60 days arrears,” the Fitch statement said.

“However, the effects may be delayed and households may feel positive outcomes on arrears in 3Q16. The August 2016 rate-cut may also improve 2H16 arrears.”

Fitch expects 90+ days arrears to increase further in Queensland, Western Australia and the Northern Territory as the impact of the mining boom slowdown continues to be felt.

Probability of Mortgage Default – Latest Estimates in 3D

As we finish our series on deep analysis of mortgages by LVR, DSR and LTI, we have incorporated the latest household survey data into our probability of mortgage default modelling by post code. The national average is 1.3%, but it rises to more than 3% in some places.

We take the DSR, LTI and LVR data, and overlay the mortgage stress and state-level economic indicators to estimate the likely relative probability of mortgage default. We also overlay assumptions on the RBA’s cash rate, expected mortgage rates, income growth and employment. This all gets mashed to derive a percentage estimate of default by post code.

We have mapped this into a 3D view, which clearly shows that the higher levels of default in coming months will emanate from QLD and WA, as the mining sector rotation continues. On the other hand, NSW and VIC are relatively benign as ultra-low interest rates continue to protect many households with large mortgages. The greater the height of the post code, the higher the risk of default.

One striking final conclusion. If you compare this picture with the DSR 3D view from yesterday, you will see that DSR and probability of default are only somewhat linked. There are a bunch of other factors which shape the likely loss outcomes.

WA Mortgage Borrowers Struggling Most

From The Advisor.

The number of home loans in arrears continued to rise during the first quarter of 2016, with Western Australia topping the list. According to the Standard and Poor’s (S&P) Performance Index, the percentage of prime mortgages more than 30 days in arrears increased to 1.13 per cent in the March quarter, up by more than 7 per cent from the same period a year ago.

“At 1.13 per cent, however, the percentage of mortgages in arrears is relatively low and remains well below the historical peak of 1.69 per cent in 2012,” S&P said.

Loan arrears increased in every state and territory during the quarter, with WA recording the highest percentage at 1.77 per cent, followed by Tasmania (1.51 per cent) and Queensland (1.42 per cent). S&P noted the high arrears levels partly reflect the tougher economic conditions that these states face.

“Queensland and Tasmania have seen rises in unemployment, and Western Australia is dealing with the ongoing effects of a slowdown in mining investment,” the credit ratings agency said. “New South Wales and the Australian Capital Territory continued to have the nation’s lowest levels of mortgage stress in Q1, with both below 1 per cent.”

Mortgage Delinquencies Higher – S&P

From Business Insider.

The mortgage arrears rate for Australian home owners is the highest it’s been in more than a year the latest Standard & Poor’s (S&P) Rating Services Mortgage Performance Index (SPIN) shows. That’s the fourth consecutive month in which arrears have risen and S&P said that the increase was across all loan types.

The SPIN is a measure of arrears in Australian residential mortgage-backed securities (RMBS)- effectively bonds issued by banks, and other lenders, in the Australian market – which are supported by the underlying cash flows of a pool of home loans. It’s not the whole market, but because of APRA rules around the performance of these securities they can be taken as representative of the entire Australian national home loan book.

So the good news is that only around 1.11% of prime RMBS were in arrears as of February 29, SPIN showed. That was up from 1.07% in January and well off the low of 0.91% in September last year.

S&P said that a large part of the result is seasonal.

“Some of the increase reflects a decline in outstanding loan balances, there is also a seasonal component at play,” S&P said noting that “arrears typically increase in January and February, reflecting the effects of Christmas spending, holidays, and January sale periods”.

S&P also said “Low doc” loans and non-conforming loans also rose to 4.55% and 4.91% respectively while by lender type the data showed that the rise was across all lenders.

“Regional banks recorded the highest arrears of all originator types, reaching 2.15% in February, up from 2.04% a month earlier. The nonbank financial institutions meanwhile recorded the lowest arrears of all originator types, at 0.76%, up from 0.75% in January”.

The uptick in regional bank loans no doubt reflects the mortgage stress highlighted by the Reserve Bank in its Financial Stability Review earlier this month.

The RBA said that while “overall stress in banks’ household loan portfolios remain low… an exception to this general theme is that regions heavily reliant on the mining sector have experienced large falls in housing prices and deteriorations in credit performance”.

Overall Australia still has very low arrears and Australian consumers have large mortgage offset buffers, as well as many borrowers being well ahead of scheduled payments. But the trend is your friend as they say. Or in this case maybe not.

Australian Mortgage Arrears Stay Near Record Lows

Australian mortgage arrears have reached the lowest fourth quarter level in 11 years after declining 20bp year-on-year (yoy) to 0.95% in the quarter ended December 2015, Fitch Ratings says. The level of arrears in 4Q15 reflected strong house price growth, low unemployment, low standard variable rates and low inflation.

Self-employed borrowers continue to experience financial difficulties despite positive serviceability factors as indicated by the Low-doc Dinkum Index, which recorded a 32bp increase in 30+ days arrears to 7.29% in 4Q15.

The annualised loss rate remained low in 4Q15 at 0.02%, unchanged for the third quarter in a row. Fitch expects an uptick in losses over 2016 as property price growth moderates. In the year to March 2016, property price growth in the combined capital cities was 6.4%, slowing from the double-digit growth experienced over much of 2H15.

Losses are likely to remain limited, despite the likely slowdown in property price growth, because of tighter serviceability assessments recommended by the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission. The introduction of measures, such as interest-rate floors, means borrowers should have more buffers to withstand increases in interest rates and unemployment, and a slowdown in the housing market.

The changes to underwriting standards are positive for holders of newer vintage RMBS transactions, especially in the current low-interest-rate and high house price environment that has fuelled household borrowing.

Fitch’s Dinkum RMBS Index tracks the arrears and performance of the mortgages underlying Australian residential mortgage-backed securities (RMBS).

ABC 7:30 Does Mortgage Debt Burden

On Monday 7:30 did a segment on the mortgage debt burden on Australian households. Using a leaked report prepared by APRA from before the GFC they indicated that the regulator was concerned about the level of mortgage debt in 2006, and included modelling to suggest that up to 7% of households could default by 2009, with ensuing pressure on the banks. At that stage mortgage debt was in the region of $700 bn.

Of course, the get-out-of-jail card was the GFC, with ensuing cuts in interest rates, the cash splash, and income growth meant the concerns were overtaken by events, and both households and banks survived (though some small ones were mopped up along the way). By the way, our own mortgage stress modelling should the same level of risks back then.

Jump forward to 2016, the total exposure of the banks to mortgages has doubled, interest rates are very low, and lending standards proved to be lax, such that the regulators have been tightening them recently. The big question is of course, whether the risks in the system, despite capital buffers being raised and lending criteria are being tightened, still exist.

We see mortgage stress at similar levels to those of 2006 (despite the ultra-low interest rates), 36% of loans are for investment properties, incomes are stagnant. Delinquency is set to rise.

If interest rates were to rise, some households would get into trouble. Our own modelling suggests about 9% of borrowers are now sitting with loans outside current underwriting limits.

And remember, the root cause is the RBA policy of using households to try and fill the hole left by the declining mining boom – housing finance growth was planned and wanted. Household debt has never been higher.

Mortgage Delinquency Mapped

Today we release the latest modelling of our mortgage probability of default, and a map showing the current and predicted default hot spots across Australia. The blue areas show the highest concentrations of mortgage defaults. The average is 1.2%, but our maps show those areas a little above the average (1.2%-1.7%) and the most risky (above 1.7%). The highest risks are more than twice the national average.

Mining heavy states and post codes are under the most pressure.

As part of our household surveys, we capture data on mortgage stress, and when we overlay industry employment data and loan portfolio default data, we can derive a relative risk of default score for each household segment, in each post code. This data covers mortgages only (not business credit or credit cards, which have their own modelling).

Given that income growth is static or falling, house prices and mortgage debt is high, and costs of living rising, (as highlighted in our Household Finance Confidence index) pressure on mortgage holders is likely to increase, especially if interest rates were to rise. In addition, the internal risk models the major banks use, will include a granular lens of risk of default.

So, some borrowers in the higher risk areas may find it more difficult to get a mortgage, without having to jump through some extra screening hoops, and may be required to stump up a larger deposit, or cop a higher rate.

In QLD, locations including Camooweal, Clermont, Theodore, Loganlea and Gulngai score the highest.

In NSW, locations including Quirindi, Stanhope Gardens, Duri, Greta and Brewarrina scored high.

In VIC, Berwick, Endeavour Hills, Darnum, Moonee Ponds and Pascoe Vale scored the highest.

In WA, Butler, Port Kennedy, Merriwa, Secret Harbour and Nowergup scored high.

In SA, Montacute, Marree, Macclesfield, Stirling and Uraidla scored the highest.

Mortgage delinquencies on the rise, says Moody’s

From Australian Broker.

Changing economic conditions at home and abroad will result in an increase in the number of Australian mortgage delinquencies in the coming year, according to credit rating firm Moody’s.

The latest monthly review of the performance of Australian prime residential mortgages by ratings firm Moody’s shows delinquencies in excess of 30 days rose to 1.20% in November 2015 from 1.14% in October 2015.

Moody’s puts that monthly increase down to seasonal factors such as household overspending in the run up to Christmas, but still believes 2016 will see a higher number of delinquencies than 2015.

“The housing market has shown signs of cooling over recent months,” Moody’s assistant vice president – analyst Alana Chen said.

“Strong housing market activity in both Sydney and Melbourne helped foster relatively strong economic performance in the respective states of New South Wales and Victoria in 2015.

“But a slower pace of house price growth will mean a slowdown in economic activity and will contribute to a deterioration in mortgage performance in 2016 from current exceptionally healthy levels.”

Moody’s predicts the slower growth of house prices will continue as the Australian economy faces some challenges through 2016.

“Slowing growth in China, Australia’s biggest export market, and declining commodity prices, which are at or near multi-year lows, will also put pressure on the Australian economy and contribute to below-trend growth and a soft labour market in 2016,” Chen said.

But while Moody’s predicts a growing number of borrowers are at risk of becoming delinquent, not all are convinced that will be the case.

“With all respect to Moody’s, who have a number of economists working on this sort of thing, I find it difficult to believe we’re going to see a real rise in the number of delinquencies,” Jane Slack-Smith, director of Investors Choice Mortgages, told Australian Broker‘s sister publication, Your Investment Property.

“I’ve been a broker for 10 years and a property investor for a long time too and that’s given me a lot of experience in reading the market and I can’t really see anything at the moment that’s going to cause a rise (in delinquencies).”

Slack-Smith believes the period of low interest rates have allowed a large proportion of Australian borrowers to get in position where they a comfortable with their financial commitments, while others have been prevented from getting in over their heads.

“With the lower interest rates we’ve had I think a lot of people have taken advantage of that. A lot of people have built up their redraw or offset account so they’re in a position where they’re pretty comfortable with everything,” she told Your Investment Property.

“The other thing is that the APRA and ASIC changes have quelled a lot of irresponsible lending that might have happened.

“It was a pretty heavy handed approach, but the fact that people were assessed on a 7.5% interest rate and the servicing criteria was made tougher means there’s already been a buffer built in so that people can manage if we do see interest rates start to move up.”

The top 100 postcodes at risk of mortgage default

The AFR has done a nice piece on the post code level analysis we completed, and a nice interactive map. Here is the guts of the article, citing DFA.

It’s not just households in Western Sydney and the outer suburbs of Melbourne and Brisbane who are feeling the pressure of paying their monthly mortgage.

A compilation of the top 100 postcodes most at risk of mortgage default by consultancy firm Digital Finance Analytics found a wide geographic spread of suburbs across the country where people could face financial collapse when interest rates start to rise.

The outer suburbs of Canberra, southern Tasmania, Darwin and southern Gippsland in Victoria are some of the regional areas that have been hit by mix of industrial closure, high unemployment and low wages growth, which leaves resident vulnerable to financial collapse.

Digital Finance Analytics principal Martin North said residents of Western Sydney were used to flying close to the wind when it came to household finances.

“There are clearly some western Sydney suburbs and inner-Sydney in the top 200 or 300 postcodes but this is about the probability of default,” Mr North told The Australian Financial Review.

“The probability of default is a complex matrix. It’s not just the lower socio-economic areas [like Western Sydney] because they don’t have big loans and already have more conservative loan criterias.”

Mr North said the postcodes where households are at risk are quite often in regional areas with increasing unemployment – and where they may struggle to find another job.

“The most difficult thing for a mortgage holder is suddenly losing your job because income goes from a certain level to a lower level and it’s quite hard to manage,” he said.

“Events across Australia impacting on employment are probably the best leading indicator of the probability of default.”

Many of those in regional areas are also geographically isolated if they lose their jobs – and don’t have the same employment alternatives that may be on offer for those living in bigger cities such as Sydney, Melbourne and Brisbane.

Two per cent increase poses high risk

In a breakdown of the top 100 postcodes, almost a quarter were in Tasmania (23), followed by Victoria (19), NSW (18), Queensland (16), South Australia (14) and Western Australia (5).

The closure of manufacturing industries in northern Adelaide, the mining downturn in Western Australia, Queensland and in NSW’s Hunter Valley and the public service heartland of Canberra are all mortgage stress hotspots, according to the modelling.

There was also an intergenerational element with most of the households at risk of default including those under 35-years-old who have been lured by record low interest rates.

“My view is these are households that are maxed-up because of the debt they’ve got and with current low interest rates they are just getting by,” Mr North said.

“But if interest rates go up this is where you’ll see the first impact. If interest rates are 2 per cent higher it would create significant pain for households.

“And the risks seem to be higher amongst younger households. I think people have been lured into the market probably sooner than they should have by lower interest rates and rising property values.”

The Canberra postcodes of 2902 (Kambah), 2900 (Tuggeranong, Greenway) and 2903 (Oxley, Wanniassa) top the mortgage stress list, with Tasmanian postcodes in the state’s north and south rounding out the top 10.

Queensland’s mining belt of Mackay (postcode 4721), Brisbane’s outer suburbs (4131), and the outer-suburbs of Melbourne (Essendon, Tullamarine) as well as Hunter Valley’s 2343 scrape into the top 50.

The top 100 postcodes are rounded out by more mining towns (Fitzroy and Blackwater in Queensland), the suburban battlers in south-east Queensland’s Logan (4128), NSW’s Macquarie Fields (2564) and The Ponds (2769).

The typical assumptions about mortgage stress is where more than 30 per cent of household income is spent on home repayments.

But Mr North said this was too simplistic. He also overlays industry employment data as well as information from credit rating agencies about actual defaults.

The National Australia Bank has red-flagged 40 postcodes across the country where business and personal loans are at a higher risk of default, especially when mixed with the stressful combination of rising interest rates and higher unemployment.

In its 40 hotspots, NAB is conducting a more stringent assessment of loan applications, including increasing the amount of equity that borrowers require.

Reserve Bank of Australia assistant governor Christopher Kent last week said the central bank predicted unemployment would remain high until 2017.

Loan Probability Of Default By Post Code

DFA’s coverage in the SMH today relating to the probability of default by post code has stimulated significant interest. As part of our household surveys, we capture data on mortgage stress, and when we overlay industry employment data and loan portfolio default data, we can derive a relative risk of default score for each household segment, in each post code. This data covers mortgages only (not business credit or credit cards, which have their own modelling).

Given that income growth is static or falling, house prices and mortgage debt is high, and costs of living rising, (as highlighted in our Household Finance Confidence index released yesterday), pressure on mortgage holders is likely to increase, especially if interest rates were to rise, which we have argued will happen sometime (and perhaps sooner rather than later given the recent RBA commentary on jobs and capacity). In addition, the internal risk models the major banks use, will include a granular lens of risk of default.

In the CBA results last week we saw some leading indicators of potential higher risks from the lender with the biggest owner occupied portfolio. So no surprise, the banks are aware of potential relative risks, especially if credit decisions are automated. In fact some of the smaller lenders appear to have greater flexibility.

Here is the national map of relative default probability. It shows the relative ranking, with the higher probability ranked 1, and clustered into meaningful groups.