Arrears steady, prepayments slow

Analysts look at what is causing slower prepayments in 2018

Arrears steady, prepayments slow

News

By Rebecca Pike

While mortgage arrears have held steady in the second quarter of 2018, prepayment rates have slowed, according to new data from S&P Global Ratings.

Prime mortgage arrears have averaged around 1.37%, increasing marginally in the second quarter of 2018.

The expectation from researchers is that arrears will continue to increase modestly, given softening property prices, rising interest rates and tougher refinancing conditions for some borrowers.

Offsetting those conditions is improved refinancing prospects for many more borrowers as lenders continue to compete for borrowers of a good credit quality.

Around 70% of loans in the residential mortgage backed securities (RMBS) sector are to owner-occupiers, 80% of loans are principal-and-interest loans, and around 72% of loans have a loan-to-value ratio of 75% or less.

Credit collateral is therefore relatively strong and likely to weather some deterioration in key macroeconomic variables.

According to analysts at S&P Global, the slowdown of prepayment rates could be attributable to factors such as the growth in interest-only lending in recent years, refinancing pressures for some borrowers, and the growth in loan-offset facilities.

A slowing in prepayment rates can quicken a rise in arrears if it reflects a slowdown in refinancing activity. Borrowers of a lower credit quality are more susceptible to this risk.

However S&P Global said, “We do not expect refinancing pressures to be the predominant cause of a slowdown in prepayment rates because most of the loans that underlie Australian RMBS portfolios have a low credit risk profile. We will continue to monitor this trend, but we do not expect this slowdown to cause any rating pressure in portfolios in the next 12 months.”

S&P use the Standard & Poor's Performance Index (SPIN) to measure the weighted-average arrears more than 30 days past due on residential mortgage loans in publicly and privately rated Australian RMBS transactions.

The value of loans underlying Australian prime RMBS transactions, including noncapital market issuance, was $123.92billion as of June 30, 2018.

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