S&P – Digital Finance Analytics (DFA) Blog

Mortgage Arrears Ease A Little In August – S&P

According to ratings agency Standard and Poor’s (S&P), the percentage of delinquent housing loans contained in Australian prime residential mortgage-backed securities (RMBS) fell to just 1.10% in August from 1.17% in July.

S&P said arrears decreased in all states and territories except the Australian Capital Territory (ACT) over the month, with noticeable improvements in Australia’s mining states and territories.

“The Northern Territory (NT) recorded the largest improvement, with arrears declining to 1.63% from 1.98% a month earlier,” S&P said. “In Western Australia, arrears fell to 2.22% in August from a historic high of 2.38% in July.”

The improvement may reflect an improvement in economic conditions in those locations following recent increases in commodity prices, along with a pickup in employment levels.

Improvement was also seen in Australia’s most populous states, where most Australian home loans are domiciled.

“The more populous states of New South Wales, Victoria, and Queensland, where around 80% of loan exposures are domiciled, recorded an improvement in arrears in August,” the agency said.

Despite the small increase in the ACT, at 0.63%, arrears still remained at the lowest level across the country.

The broad improvement in home loan arrears over the month can be seen in the map below from S&P.

Source: Standard & Poor’s

And this chart and table shows the level of arrears by delinquency duration.

Source: Standard & Poor’s

S&P says that “relatively stable employment conditions and low interest rates continue to underpin the low levels of arrears for most Australian RMBS transactions”, adding that it believes “lending standards generally have tightened in many areas since attracting greater regulatory scrutiny beginning in 2015.”

Looking ahead, the ratings agency says that while the prospect of higher mortgage rates could lead to an increase in arrears, particularly among those with high loan-to-value ratios, stronger labour market conditions should keep any potential in check.

“Provided employment conditions remain relatively stable, however, we do not anticipate arrears materially increasing above current levels in the next 12 months,” S&P says.

“Some loans underwritten before 2015 could be more susceptible to higher arrears, particularly interest-only loans with higher loan-to-value (LTV) ratios for which no equity has built up during the interest-only period, in our opinion.”

Genworth Under Ratings Agency Scrutiny

Genworth, the listed Lenders Mortgage Insurer updated the ASX yesterday of the results of the outcomes of recent rating agency reviews. The ratings agencies appear somewhat split on how to assess the risks in the sector.

Fitch ratings affirmed the A+ IFSR and maintained the outlook at stable – saying Genworth had a robust standalone credit profile, solid operating performance, strong capital ratios and conservative investment approach. They noted a generally stable operating environment which continues to support the performance of the insurance portfolio.

Standard & Poor’s rating affirmed the A+ IFSR and maintained the outlook at negative noting standalone credit profile, business risk profile and strong capital and earnings position. “Claims paying resources, which include conservatively invested capital, claims reserves and external reinsurance are supportive of the company’s ability to absorb a significant level of claims if Australia were to experience a severe extended economic downturn”.

Moody’s has however revised its unsolicited IFSR on GFM1 from A3 with a negative outlook to Baa1 with stable outlook. This follows Moody’s wider rating action on financial institutions in June 2017 to reflect its view that “risks in the Australian housing market have risen, heightening the financial sector’s sensitivity to adverse shocks”.

So, you “pays your money and takes your choice!”

Long Term Mortgage Delinquencies Rise

The latest S&P data shows that mortgages more than 90 days in arrears increased to 2.20% in June from 2.10% the previous month, despite a seasonal easing. Loan balances continue to grow.

From Australian Broker.

The volume of delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS) has dropped from 1.21% to 1.15% between May and June, according to S&P Global Ratings.

While S&Ps report, RMBS Arrears Statistics: Australia, stated that arrears usually fall month-on-month at this time of year, analysts also attributed the decline to an increase in outstanding loan balances in June.

Declines were experienced across the board with the Standard & Poor’s Performance Index (SPIN) falling for prime Australian mortgages in arrears by over 30, 60 and 90 days.

Queensland experienced the largest decline in arrears in percentage terms falling from 1.72% to 1.62% between May and June. At the other end of the spectrum, Western Australia retained top place with arrears at 2.32%.

Looking at the type of lenders, arrears fell in all categories except ‘regional banks’ which recorded an increase in the number of delinquencies from 2.27% to 2.30%.

“The SPIN for nonconforming home loan arrears fell to 4.84% in June from 5.16% in May against a backdrop of increasing loan balances. The largest improvement was for loans 60-90 days in arrears, which fell 0.31 percentage point to 0.78% in June. Mortgages more than 90 days in arrears increased to 2.20% in June from 2.10% the previous month, however.”

Rate rises driving up arrears

From Australian Broker.

Global ratings agency Standard & Poor’s has reported that recent rate moves by the major and non-major banks are behind a rise in national mortgage arrears.

The number of home loan delinquencies underlying Australian prime residential mortgage backed securities (RMBS) increased from 1.16% in March to 1.21% in April, according to a recent S&P report, RMBS Arrears Statistics: Australia.

“Part of the increase reflects a decline in outstanding loan balances, but we believe interest-rate rises announced by different lenders during the past few months affected the Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages, given that most of the loans are variable-rate mortgages,” S&P analyst Erin Kitson said.

The SPIN looks at the weighted average of arrears more than 30 days past due on residential mortgages in publicly and privately rated Australian RMBS transactions and is calculated on a monthly basis.

Arrears increased in all states and territories except the ACT, NT and Tasmania. NSW, Victoria and Queensland – which account for about 80% of total loan balances – all recorded increases in arrears between March and April. The largest surges in delinquencies in this time period were as follows:

Queensland (1.58% to 1.66%)

New South Wales (0.85% to 0.91%)

Western Australia (2.27% to 2.32%)

However, the number of delinquencies in NSW and Victoria remain below the weighted average SPIN for prime mortgages.

The increase in arrears was greatest amongst the regional banks with mortgage payments more than 30 days late rising from 2.02% in March to 2.27% in April. This was around 1.8 times higher than the prime SPIN, Kitson said.

“We attribute this in part to a decline in outstanding loan balances and the regional banks’ greater exposure to Queensland; around half of all regional banks’ outstanding loan balances are domiciled in the state.”

In comparison, non-regional banks recorded an increase in arrears from 1.10% to 1.14% between the two months while non-banks rose from 0.87% to 0.95% in the same time period. These figures remained below the SPIN.

Finally, for non-conforming loans, arrears fell from 6.17% to 5.03% between April and March, due to a backdrop of increasing loan balances.

“Interestingly, mortgage repayments more than 90 days past due made up around 41% of the total nonconforming arrears in April compared with 60% for prime arrears. The proportion has been broadly consistent in the nonconforming sector for the past 10 years, but has increased more markedly in the prime sector during the period.”

Improvements in the seasonally adjusted unemployment rate in May are credit positive for mortgage arrears, Kitson said.

“Relatively stable employment conditions in Australia have underpinned the low levels of arrears and losses in Australian RMBS transactions; loss of income is a key cause of mortgage default. Declining unemployment and positive jobs growth are fundamental to the ongoing stable collateral performance of Australian RMBS.”

Increase in delinquencies predicted for 2017

From Australian Broker.

After sitting at historically low levels for 2014 and 2015, the number of mortgage delinquencies rose last year. This signalled the start of a trend which analysts expect to continue throughout the coming 12 months.

S&P Global Ratings’ RatingsDirect noted that arrears increased in 2016 despite low interest rates and stable unemployment rates.

This rise – which commenced in November 2015 and continued until May – was driven by a surge in the rate of under and part-time employment while fulltime employment growth declined.

“When we say they’ve gone up, these are modest increases. It was slightly under 1% a year ago and it’s 1.15% now but clearly there’s a trend. If you’re looking at year-on-year comparisons, these have been moving upwards,” Erin Kitson, primary credit analyst at S&P Global Ratings told Australian Broker.

This trend would persist if the Reserve Bank of Australia (RBA) increases the cash rate or if lenders continue to move out-of-cycle. Conversely, a drop in rates would see arrears performance trend lower.

“In terms of any meaningful movement, it will largely be driven by what happens with interest rates.”

These predictions are based on the Australian residential mortgage backed securities (RMBSs) that S&P rates, Kitson said. This includes about $140 million worth of loans outstanding.

“So it’s really a bit of a snapshot of the overall mortgage performance. Obviously, it doesn’t include every single loan in the Australian mortgage market.”

Since most of the loans included in these RMBS’s have variable rates, there is a correlation between what interest rates and arrears are doing, she said.

However, Kitson noted that overall numbers of delinquencies are still relatively low with even the 90+ day mortgage arrears around 0.55%.

“Your 90+ day mortgage arrears are a good proxy for default. At 0.55%, that’s still quite a low number. Given that, my opinion is it’s probably not likely to tip over into lots of defaults which then impact the housing market.”

Mortgage holders at greatest risk of rising interest rates and economic changes are those with higher loan to valuation (LTV) ratios as they have less wriggle room and less equity in their home loans, she said.

“If we’re looking at the RMBS portfolio, about 17% of borrowers have an LTV of greater than 80%. Generally in terms of when an economic situation starts to change, that will be felt first on higher LTV borrowers.”

Prime mortgage arrears rise 25% from a year ago

From Mortgage Professional Australia.

Prime mortgage arrears are up 25% from a year earlier, but remain relatively low, a report by S&P Global Ratings shows.

However, the number of prime home loan delinquencies fell in November 2016 from the previous month.

A total of 1.15% of the mortgages underlying Australian prime RMBS were more than 30 days in arrears in November, as measured by Standard & Poor’s Performance Index (SPIN), down from 1.16% in October.

Arrears fell month on month for most originator categories apart from regional banks, which recorded an increase in arrears to 1.88% from 1.85% a month earlier.

Nonbank financial institutions have maintained the lowest arrears, at 0.63%, followed by nonbank originators, at 0.95%, then other banks, at 0.96%. Major bank arrears were unchanged month on month in November.

Mortgage Arrears Move Higher, Again

Standard & Poor’s Performance Index (SPIN) for May 2016 shows that 1.21% of high quality residential mortgage-backed securities (RMBS) were in arrears during the month, which is higher than the 1.14% reported in April. In fact this is the seventh month in a row that arrears have lifted. A year back the index was standing at 1.07%.

The index covers the universe of Australian RMBS rated by S&P. It measures the weighted-average arrears more than 30 days past due on loans in RMBS transactions. It is worth highlighting that it does not necessarily represent the entire market, as specific loan portfolios will be selected to package up and sell.

S&P says that the larger upward movements were in the major banks and other bank categories, while non-bank financial institutions was the only sector to see a decline in arrears. Most of the increase in arrears for the month was in the more severe category of 90-plus days overdue. The major banks’ 90 day-plus arrears rose four basis points to 0.48%, while non-banks fell a point to 17 basis points. This is an interesting observation as the major banks, in theory at least should have more sophisticated risk assessment capabilities.

They also say that the proportion of non-conforming loans in arrears increased to 4.71 per cent during the month from 4.25 per cent in April. However, note the non-conforming measure tends to exhibit some volatility from month to month and remains low by historical standards and well below the peak of 17 per cent in 2009.

Australia On Credit Downgrade Watch – S&P

There is a one in three chance of Australia receiving a sovereign ratings down grade, according to S&P.

From Business Insider.

Credit rating agency Standard and Poor’s (S&P) has placed Australia’s AAA rating on credit watch negative from its previously stable outlook.

While S&P also said it had “affirmed our ‘AAA’ long-term and ‘A-1+’ short-term unsolicited sovereign credit ratings on Australia” the move to a negative outlook does imply Australia is now at a heightened risk of losing its AAA rating.

Worth noting too that S&P indicate that states and major banks are also on watch, which is logical considering that these entities rely directly or indirectly on Federal Government support, and a reduction in the rating of the “peak” body would flow through, leading to potentially higher funding costs. “The negative outlooks on these banks (Commonwealth, Westpac, ANZ and NAB) reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” S&P said.

S&P said in a statement accompanying the announcement that:

The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia’s high level of external indebtedness and therefore inconsistent with a ‘AAA’ rating.

Crucially S&P says it is “more pessimistic about the central government’s revenue outlook than the government was in its latest budget projections”.

In a strong message to both side of the political fence S&P said that because Australia carries a high level of net external debt “Australia’s general government sector fiscal outcomes need to be stronger than its peers’, and net debt needs to remain lower, to remain consistent with the current ‘AAA’ rating”.

That’s sounds ominous and S&P notes that “Australia’s external debt net of public and financial sector assets (our preferred stock measure) is over three times current account receipts (CARs)”. They also highlight that the current account deficit of 5% of GDP this year will “only moderate slightly during the forecast horizon to just over 3%”.

As a result “Australia’s 2016 gross external financing requirement of US$630 billion is over half of GDP,” S&P said.

That sounds ominous but S&P expects “Australia’s external borrowers to maintain easy access to foreign funding”.

Summing up what all of the above and the change to negative outlook means S&P said (our emphasis):

There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.

The dollar reacted to the announcement, but has recovered somewhat since.