Mortgage stress to ‘continue to rise moderately’ this year, says Moody’s

The Australian 3:01pm March 13, 2017

Michael Bennet

Ratings agency Moody’s has warned investors that securities backed by mortgages will come under more stress this year amid “less favourable” conditions in the housing market.

As the government explores ways to improve housing affordability following heady price increases, Moody’s today revealed delinquency rates for “prime” residential mortgage-backed securities would “continue to rise moderately” this year.

In the fourth quarter of last year, 30 plus day delinquencies on prime RMBS — mortgages that are considered to the safest for investors to buy — deteriorated to 1.57 per cent from 1.5 per cent at the end of September, Moody’s said.

Lenders — including the major banks — sell RMBS to investors for funding.

“Weaker economic conditions in states reliant on the mining industry, rising underemployment, weak wage growth and less favourable housing market conditions will drive delinquencies higher,” said Moody’s senior analyst Alena Chen.

“Nevertheless, losses will remain low, because of the build-up in home equity and deleveraging.”

While noting higher delinquencies were common at the end of the year during the holiday season, Moody’s said delinquency rates rose for all prime RMBS “issuer groups”, including major banks, regional banks, non-banks and other authorised deposit-taking institutions.

“Other ADIs” -- smaller lenders that take deposits — had the lowest delinquency rate at 0.59 per cent. Non-ADIs — non-banks that don’t take deposits — had the highest rate of 2.7 per cent.

Lenders are generating strong profits from the majority of their mortgage books while battling higher arrears and stress from customers in mining regions and states exposed to the slump in mining investment, particularly Western Australia.

Some lenders are also having to take steps to slow growth in lending to property investors amid a pick-up in demand in the past six months, an issue regulators are increasingly watching.

Commonwealth Bank, the nation’s largest, last month revealed it had increased provisions in WA after revealing home loans more than 90 days in arrears had risen to 1 per cent, compared with the bank’s overall portfolio where 0.53 per cent of borrowers were behind on payments.

CBA chief Ian Narev conceded that while the overall economy had improved in the past six months on higher commodity prices and lower dollar, “a lot” of customers were still “doing it tough” and those seeking financial hardship assistance remained “elevated”.

Mr Narev said CBA regularly stress-tested its book to a property price collapse and it had “remained strong in downturns before and we make sure we manage our credit risks to make sure we could do that again if that occurs”.

After a drop in the number of auctions in Sydney and Melbourne on the weekend, researcher Digital Finance Analytics warned that it could be a “sign of some slowing” in the property market’s momentum.