Latest rating agency RMBS report shows arrears remain at very low levels supported by stable employment figures.
Background
The ratings agency S&P Global Ratings (S&P) rates the majority of Residential Mortgage Backed Securities (RMBS) issued in the Australian market. This means S&P is able to comment on the wider RMBS market performance and provide insights into any trends in the mortgage market.
The S&P Global Ratings Mortgage Performance Index (SPIN) is a measure of arrears that covers the universe of RMBS rated by the agency. A mortgage is considered to be in arrears when the balance of the loan exceeds the scheduled loan amount, this occurs when a borrower is behind on their mortgage repayment.
The SPIN index looks at aggregate arrears greater than 30 days for prime and non-conforming transactions. Prime RMBS consist of pools of mortgages where the borrowers have clean credit histories, these borrowers are considered to be ‘bank quality’ borrowers. Whereas, non-conforming loans are those that would not be eligible for a loan from a traditional prime lender and are generally not eligible to be covered by lenders’ mortgage insurance.
At current levels, arrears are very low when compared to historical levels and within the international context, pointing to the resilience of the Australian property market.
We continue to believe that employment is a strong leading indicator of whether arrears will translate into actual losses as a loss of income generally leads to mortgage defaults.
Arrears Statistics
The latest SPIN data released by S&P shows that Prime SPIN was 1.04% at 30 June 2018 (1.03% a year ago) and non-conforming SPIN was 3.44% (4.69% a year ago). This indicates that the arrears performance of loans included in RMBS transactions has stabilised. This is illustrated in the charts below.
Source: S&P
Drilling down into the Prime mortgage sentiment
Major banks account for more than 40% of the Prime SPIN. Within the Prime segment, full-documentation loans have much lower arrears than low-documentation loans. The full-doc SPIN was 1.00% at June 2018, compared to 4.56% for low-documentation loans. Importantly, the full-documentation segment represents over 98.8% of the outstanding Prime RMBS balance.
Furthermore, within the Prime SPIN segment, S&P has provided a comparison between the arrears of loans originated by various issuers. This comparison shows that arrears of RMBS transactions issued by major and regional banks are higher than the Prime SPIN, whereas arrears of non-bank issuers, such as ACCU, CUA, Firstmac and Resimac, are substantially lower than the Prime SPIN. .
As would be expected, there are definite pockets of weakness by geography specifically in Western Australia, Queensland and regional New South Wales. Metropolitan Sydney and Melbourne are performing much better than these regions.
Opinions expressed from FIIG Investment Strategy Group may differ from those expressed by FIIG Credit Research.