Tag: S&P SPIN

NSW Mortgage Arrears Higher In July – S&P

Australian prime home loan arrears fell in July in all states except NSW and South Australia, but they remain above their five-year average, new data from Standard & Poor’s has shown, via The Adviser.

The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages dropped to 1.49 per cent in July 2019, down from 1.51 per cent a month earlier, S&P Global Ratings’ recent RMBS Arrears Statistics: Australia report showed.

According to the data, which measures the weighted average of residential mortgage loans that are more than 30 days past due in publicly and privately rated Australian RMBS transactions, prime arrears typically drop in spring and are expected to decline during the third quarter of the year.

However, while the arrears index dropped month-on-month, the data showed that arrears were 11 basis points higher than they were in July 2018 and remain above their five-year average of 1.25 per cent.

Looking at arrears on a national level, arrears improved in six states and territories, with NSW and South Australia showing an uptick in arrears.

NSW saw an increase to 1.29 per cent, while South Australia saw arrears rise to 1.54 per cent in July 2019.

Western Australia recorded the largest drop in arrears during July, with the rate decreasing 14 basis points to 2.91 per cent.

According to S&P, the majority of this improvement was for loans 30-60 days in arrears. Loans more than 90 days in arrears, however, continued to increase in the western state.

Owner-occupier arrears improved in July, falling by 3 basis points to 1.71 per cent.

However, investor arrears remained mostly unchanged in July, falling by 1 basis point to 1.46 per cent from the previous month. 

According to S&P, this partly reflects the “generally tighter lending conditions for investors in the current environment”.

“We expect arrears to continue to decline as the recent rate cuts filter through. These improvements are likely to be seen in the earlier arrears categories, which are more sensitive to interest-rate movements. We expect longer-dated arrears to remain elevated in a softer economic environment,” S&P analysts stated.

“Recent rises in housing finance approvals could bolster refinancing conditions, which started to improve in July, rising 5.4 per cent in seasonally adjusted terms. This will help to stabilize arrears and prepayment rates if the current momentum continues because refinancing is a common way for borrowers to self-manage their way out of arrears.”

RBA on the rising arrears rate

The level of mortgages past due has been noted in recent months, with the Reserve Bank of Australia’s head of financial stability, Jonathan Kearns, noting in June that the number of people in arrears on their home loans had reached the highest level recorded since the global financial crisis.

In an address to the 2019 Property Leaders’ Summit in Australia in June, Mr Kearns discussed the factors contributing to the continual rise in home loan arrears.

Mr Kearns claimed that “cyclical upswings” in arrears were attributable to weak economic conditions, which include falling or stagnant wages and softness in the housing market – which may inhibit some borrowers from selling their property to ease their mortgage burden.

The head of financial stability also acknowledged that tighter lending standards can conversely impact a borrower’s ability to meet their mortgage repayments, pointing to previous restrictions on interest-only lending, which prevented borrowers from rolling over the interest-only period.

Mr Kearns also conceded that tighter serviceability measures may prevent distressed borrowers from refinancing their loan, cited by S&P as one of the factors contributing to the rise in delinquencies.

However, Mr Kearns pointed to internal data collected by the Reserve Bank, which suggested that the application of tighter lending standards has been “effective” in improving credit quality.

Mr Kearns said at the time that he expected the overall arrears rate to continue rising, but he claimed the trend would not pose a significant threat to financial stability.

“To the extent that we can point to drivers of the rise in arrears, while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer,” he said.

“But with overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”

Mortgage Arrears Tick Up In May (Again)

The latest S&P Ratings SPIN index to May 2018, based on their portfolio of mortgage backed securities showed a further move up in defaults compared with last month, from 1.36% to 1.38%.

In fact, Western Australia’s default rates improved a little, as did Victoria, but there were rises in New South Wales of 0.02%, Queensland of 0.04% and Northern Territory up 0.52%.  ACT has the lowest default rate at 0.75%, followed by New South Wales at 1.05% while the Northern territory and Western Australia have the highest rates of 30 default at 2.84% and 2.67% respectively.

Looking across the period in default, the most significant rise across prime loans was in the 61-90 days bracket, up from 0.22% in April to 0.25% in May. 90 day plus arrears remained the same at 0.67%.

Significantly, the larger hikes were see in the major bank portfolios, with the prime spin rising from 1.36% last month to 1.38% in May. There was a rise in 61-90 day past due loans, from 0.22% last time to 0.25%.

Whilst these moves are small, arrears are now as high as they were back in 2011, and interest rates are much lower today, so this highlights the risks in the system. This does not appear to be a seasonal issue, it is more structural.

 

Mortgage Arrears on the rise in early 2018

From Australian Broker.

Employment conditions may be improving across the country but it seems many Australian lenders are still on shaky ground after recent data reported a rise in home loan arrears rose in January.

The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages increased to 1.30% from 1.07% in December 2017, according to a report by S&P Global Ratings.

While the level of mortgage defaults remains relatively low, the report – titled ‘RMBS Arrears Statistics: Australia’ – found that many borrows are sensitive to interest-rate movements and changes in their economic circumstances due to a high level of household debt.

Of course, it’s not uncommon to see a rise in the number of home loan arrears in January with Christmas spending and summer holidays often blamed for the imbalance. However, this year, the magnitude of the month-on-month increase in January was higher than previous movements.

“We believe the impact of incremental increases in interest rates during 2017 could be a contributing factor to the rise in mortgage arrears in January,” read a release from S&P Global Ratings.

“We believe overall arrears could moderate in the coming months,” it continued. “However, it will only become evident during the next few months whether some of the loans in early arrears categories cure or migrate into more severe arrears categories due to stretched affordability constraints.”

The report also found that no area was exempt from the increase with loans in arrears by more than 30 days increasing in January in every state and territory.

Western Australia remains the home of the nation’s highest arrears, where loans in arrears more than 30 days rose to 2.44% in January from 2.08% in December, reaching a new record high.

Conversely, New South Wales continues to have the lowest arrears among the more populous states at 0.98% in January.

“Improving employment conditions will help keep defaults low, but rate rises will have an impact on borrowers,” said S&P Global Ratings.

“The prudence of loan underwriting standards, particularly debt-serviceability calculations, is fundamental to how well borrowers absorb these higher costs.”

The financial services firm also offered insight into which loans it identified as being most susceptible to higher levels of arrears:

Interest-only loans that are approaching their interest-only expiry date

As lending standards for interest-only loans were less stringent before 2015, interest-only loans underwritten before then could be more susceptible to repayment shock when the loans roll into an amortizing repayment structure.

High loan-to-value ratio loans

Apart from the obvious risk of having less equity built up in the home, which increases the risk of loss in the event of borrower default, borrowers with high LTV loans are also more likely to find it harder to refinance their home loan with another lender – a common way for borrowers to manage their way out of financial stress.

High debt relative to income loans

Borrowers with less of a buffer to service their mortgages are more likely to experience financial stress when interest rates rise or their economic circumstances change. The integrity of debt-serviceability standards is important in ensuring that debt-to-income serviceability assessments reflect each borrower’s actual income and expenditure patterns.

S&P says the number of delinquent housing loans have fallen unexpectedly in Australia

From Business Insider.

Standard & Poor’s detected a sudden fall in problem mortgages in February, a month when delinquencies usually rise.

The number of delinquent housing loans in Australia fell to 1.23% in February, down from January’s 1.29%, according to the RMBS Arrears Statistics: Australia report, by S&P Global Ratings.

“We normally expect arrears to increase month-on-month in February, reflecting the seasonal effects of Christmas spending and summer holidays,” says S&P.

“The month-on-month decline was unexpected, particularly at a time of rising interest rates.”

Most of the big banks last month raised rates for owner-occupier loans and for interest only loans.

S&P expects these rate increases will put further pressure on arrears.

The S&P report shows that mortgages 31 to 60 days in arrears recorded the greatest improvement in February after recording the largest increase in January.

“The month-on-month decline in arrears in February could mean that some of the rise in arrears in January was partly due to the timing of mortgage-rate
increases,” says S&P.

“Mortgage-rate increases can create an initial spike in arrears when first applied, particularly if they are introduced when more borrowers are likely to be on holidays. This might account for part of the increase we observed in January.”

Victoria and New South Wales, which together make up more than 54% of the total loans, both recorded a month-on-month decline in arrears.

Queensland was unchanged at 1.65%, the ACT rose to 0.81% from 0.78% in January and Tasmania was up to 1.51% from 1.47%.

Mortgage arrears trending upwards nationally

Mortgage arrears underlying prime residential mortgage backed securities (RMBS) have increased from 1.14% to 1.15% from the third to fourth quarter last year says S&P, as reported in Australian Broker.

These values are determined through the Standard & Poor’s Performance Index (SPIN), which measures the weighted average arrears of more than 30 days past due on residential loans in publicly and privately rates Australian RMBS transactions.

Analysts at S&P Global Ratings have said this increase is in line with expectations of a cyclical rise towards the end of the year.

While arrears in the fourth quarter were up by 19% year-on-year, levels remain far below the historical peak of 1.69% according to the S&P report, RMBS Performance Watch – Australia.

Reasons for these low levels of arrears include a low interest rate environment, and, for RMBS, seasoned loans with established payment histories, S&P Global Ratings analyst Narelle Coneybeare, told Australian Broker.

S&P predictions, however, indicate that arrears are likely to rise towards the decade-long average of 1.25% which may put some areas at risk.

“Areas where unemployment is high may be facing increasing pressure. The recent trend has, to date, been Queensland and WA facing the most pressure on arrears performance,” Coneybeare said.

New South Wales (NSW) and Victoria experienced low rates of mortgage arrears – supporting the stable SPIN levels found in the report. Together, these states account for around 55% of total prime RMBS exposures.

While the SPIN in NSW and Victoria helped to offset higher levels of arrears in other states, analysts warned that further interest rate rises could still have negative effects.

“The majority of underlying loans in the portfolio are variable-rate mortgages, and a rise in interest rates is likely to exacerbate debt serviceability pressures, particularly for borrowers with higher loan-to-value (LTV) ratios and limited refinancing prospects,” the report stated.

Breaking down by the states, the levels of 30+ day mortgage arrears, as well as the quarterly and annual changes are as follows:

Thirty-day arrears for non-conforming loans also increased from 4.36% to 4.43% from the third to fourth quarter last year, but were down from 4.63% in Q4 2015. The latest figure is also well below the 17.09% peak experienced after the financial crisis.

“The non-conforming arrears trend reflects a few factors, including low interest rates, accompanied by a relatively benign economic environment and stable unemployment conditions,” Coneybeare said.

“We’ve also observed changes in the overall mix of loans/borrower types in the nonconforming space, with more recent vintages having lower exposure to low-doc loans, as an example.”