Aussie home loan arrears pick up

Australian Financial Review Dec 20 2016 5:10 PM

James Frost

Credit ratings agency Standard & Poors has expressed concern about an upward drift in the number of mortgage arrears, foreshadowing further deterioration in the months and years ahead.

Standard & Poors' monthly measure of Australian home loan delinquencies has drifted up in October for the second consecutive month, bucking the usual trend of falling arrears between April and November.

"It was the first month-on-month increase in October since 2011, when arrears and interest rates were higher," the ratings agency said in its regular monthly update on mortgage credit quality.

The number of prime mortgages in arrears by up to 30 days and the number of mortgages in arrears by 31 to 60 days both rose by two basis points in September, according to the report.

The non-conforming mortgages underpin residential mortgage backed securities (RMBS) which are typically used by banks to raise funding overseas.

Analysts at Standard & Poors noted that although mortgage delinquencies were at record lows up until recently, there is little doubt over which way they are headed.

"The markets currently expect an increase in mortgage rates, and we believe this would result in an increase in home-loan arrears because most of the loans underlying Australian RMBS portfolios are variable rate," the report said.

"Arrears now have started to rise, even while interest rates remain low and the unemployment rate is relatively stable. While arrears remain below their peak and 10-year average, mortgage stress is apparent in parts of the country."

A rise in the number of bad and doubtful debts from record lows was a feature of the most recent reporting season which saw the big four record a slight uptick in 2015-16.

The report contained further evidence of this trend with arrears at the major banks rising from 1.11 per cent to 1.14 per cent.

The report showed that arrears at regional banks were amongst the worst although they were improving with the number of arrears recording a month-on-month decline from 1.87 per cent to 1.85 per cent.

Non-bank financial institutions recorded the lowest number of arrears at 0.69 per cent, followed by other banks at 0.98 per cent and non-bank originators at 1.07 per cent.

The credit quality of non-bank originators had shown the most improvement over the last five years with arrears falling from a five-year high of 2.67 per cent to 1.07 per cent in October.