Riskier mortgages on the rise, says ratings agency

by Julia Corderoy17 Oct 2014
The recent rise of investor loans and interest-only loans could leave Australian banks exposed in the event of adverse market movements. 

According to global credit ratings and research group, Fitch, there has been strong growth in investor and interest only loans, as well as indications that owner-occupiers are also increasingly opting for interest-only terms.

 The ratings agency says this may increase the risk profile of banks' mortgage assets in the event of adverse market movements, such as higher interest rates and a general macroeconomic slowdown.

Fitch’s analysis indicates that the risk for investment mortgages is higher than in the case of owner-occupied mortgages, which suggests a speculative element to recent rises in house prices and a riskier credit profile for the banks.

Meanwhile, the rise in interest-only loans – for both investors and owner-occupiers – also raises the susceptibility of borrowers in the event of an economic downturn, due to the slower accumulation of borrowers' equity relative to more traditional principal-and-interest loans.

However, the ratings agency maintains that the risks of unmanageable losses in the mortgage portfolios of major banks are low. Since the introduction of the NCCP, low-documentation and other non-standard loans have decreased significantly, and high loan-to-value lending has remained stable as a proportion of the total, despite the rise in prices. 

The ratings agency also says the high prevalence of lenders' mortgage insurance in Australia adds a buffer in the event of losses, covering about 20%-25% of the major banks' mortgage portfolio.

But not everyone in convinced. Leith van Onselen, economist and writer for Macro Business says, “Cutting through the guff, interest only and investment loans are Australia’s subprime accident in the making.”

 

COMMENTS

  • by Bottom Line 17/10/2014 9:49:45 AM

    Yawn...probably included Construction Loans as interest only loans to make the figures what they wanted.

  • by Denise Brailey BFCSA (Inc) 17/10/2014 4:46:32 PM

    Fitch needs to pull its socks up. It cannot have an each way bet here. On one hand it says:that the risks of unmanageable losses in the mortgage portfolios of major banks are low. Well that's not our experience. Dud lending is on the increase. Then states: Since the introduction of the NCCP, low-documentation and other non-standard loans have decreased significantly. Well toxic loans still coming in under new NCCP as complaints rise. Then Fitch states: there has been strong growth in investor and interest only loans. Problem is many people who come to support groups are not "investors" they are spruiked, and they did not opt for Interest Only they have been advised to borrow on 30 year Interest Only loans and there will be mounting grief next year. Its the old bridging loan scams which were the highest closta nd most risky of loans. The only difference in 2014 is these questionable lending habits are now 30 year nightmares that implode after 5 years. As a support group we see the damage they cause. Who pays Fitch? Ah yes those who asked for ratings on RMBS packs that the Government abandoned after we raised the flag on that one in Parliament. Consumers need to see "warning" stickers on some of these products same as on packs of cigarettes, lest they be captured in debt and death traps.

  • by Regional broker 17/10/2014 9:11:18 PM

    Oh this is the same ratings agency that certified the junk mortgage bonds that caused the GFC as AAA? Why give them any space , they are just to me not credible .