Trail books to benefit from arrears shock

by Adam Smith28 Mar 2012

An unexpected jump in mortgage book arrears announced yesterday could actually yield benefits for brokers’ trail books as the average loan life stretches out.

The Fitch Dinkum Index has shown an unanticipated increase in mortgage delinquencies, with arrears rising from 1.52% to 1.57% over the final quarter of 2011. The ratings agency predicted things could get worse as seasonal Christmas spending filters through.

However, brokers may have nothing to fear from the rise, and could actually see benefits from the repayment squeeze, according to Trailer Homes director Nick Young.

“When you pull it apart, it’s more about people discharging their loans which causes a trail book’s value to fall, whereas arrears aren’t a very big issue,” he said.

Fitch theorised that the result could be due to the deterioration of house prices over 2011. However, Young commented that many brokers may not understand that in a weak mortgage market, their trail book could actually be gaining in value.

“In a poor housing market, the rate of churn decreases and the average life of a mortgage increases. If you look at the boom times back in 2004, the average life of a loan actually dropped down to below four years. It’s up to five years now, and getting longer and longer," Young explained.

"The tougher the environment, the loner the average life of the loan becomes and the more stable the trail book becomes,” he said.

The catch-22 behind this, though, could be a lack of buyers in the market.

“In a tough market there are less deals to be done. Mortgage brokers are finding it tougher and could potentially be forced to sell their trail books. So on the one hand, they’re becoming more valuable, but on the other hand there are more coming onto the market. It’s not a cut and dry thing. As times get tougher there are more sellers and less buyers,” he said.

“The thing that always amuses me is that people talk about it as though it’s a very liquid market, and it’s not. There’s not that many deals to be done. There are a lot of people interested in buying, but when it comes to writing out the cheques a lot of them aren’t there anymore,” Young added.


  • by Tony 28/03/2012 9:47:41 AM

    How many lenders pay trail when loan is in arrears?

  • by Ian 28/03/2012 9:50:23 AM

    Given that lenders don't pay trail on loans in arrears (even though they are charging higher rates), I fail to see how this adds value to the trail book when your actual trail is dropping away.

  • by Vbliquidity 28/03/2012 10:37:35 AM

    Any broker knows trails stop when the mtg is in arrears, worse further trail stops completely when trfrd to their hardship management. Surprising comment from a trail broker!