Australian RMBS delinquency rates to keep rising: Moody's

Australian RMBS delinquency rates, which rose slightly over the three months ended 31 March 2019, will continue to increase over coming quarters, according to the latest report from Moody's Analytics.

They believed arrears will rise because of high debt levels, the conversion of a large number of interest-only mortgages to principal and interest loans and declining house prices.

They suggested however that delinquency rates will only increase moderately, given stable GDP growth, low unemployment and recent interest rate cuts.

The 30+ day delinquency rate for prime Australian RMBS was 1.58% in March 2019, compared with 1.54% in December 2018 and 1.48% in March 2018.

For prime RMBS issued by major banks, the 30+ day delinquency rate was 1.75% in March 2019 compared with 1.72% in December 2018.

For regional banks, the delinquency rate was 1.65% in March 2019, unchanged from December 2018, while for prime RMBS issued by other authorised deposit-taking institutions, the delinquency rate was 0.54% in March 2019, compared with 0.50% in December 2018.

The 30+ day delinquency rate for non-conforming RMBS was 3.75% in March 2019, up from 3.23% in December 2018 and 3.05% in March 2018.

Alena Chen, Vice President of Moody’s said, "over coming quarters, we expect Australia's record-high household debt, which amounts to almost 200% of annual gross disposable income, will contribute to a moderate increase in delinquencies."

"Meanwhile, a large number of interest-only mortgages are due to convert to principal and interest loans by the end of 2020, which will cause some delinquencies over this period. Banks originated a significant volume of interest-only loans in 2014 and 2015," she said,

The five year interest-only period for these mortgages will end in 2019 and 2020.

When interest-only loans convert to principal and interest, borrowers have to make higher monthly repayments, which can lead to delinquencies.

Commonwealth Bank saw a rise in arrears in their March quarter results.

Banks have already started trying to limit a large impact of moving mortgage holders from interest only to P&I.

This time last year ANZ had 26 percent of their loan book made up of IO loans. They reduced that number to 18% as of May.

NAB have an unhealthier 26% of their loan book given to interest-only loans.

Chen said Moody's expect house price declines to lead to a moderate increase in mortgage delinquencies over coming quarters."

"House prices in Australia declined by an average of 7.3% in the 12 months to 30 May 2019, while in Sydney and Melbourne, prices declined by an average of 10.7% and 9.9% respectively."

"We expect prices to continue to decline moderately over the remainder of 2019." she said.

Mortgage delinquencies will only increase moderately, while defaults and losses will remain low, given that continued GDP growth, low unemployment and recent interest rate cuts will support borrowers' ability to meet their mortgage repayments.

Moody's Investor Service forecast's real GDP growth of around 2.5% in both 2019 and 2020.

Australia's unemployment rate was 5.2% in April 2019 and they expect it will remain relatively stable at 5.5% by the end of 2019 and 2020.

In early June, the Reserve Bank of Australia lowered the cash rate by 0.25 percentage point, which prompted most lenders to lower their floating-rate mortgage interest rates.

To see which banks decided to pass on the full rate cut, click here.