Mortgage arrears to increase in 2018: Moody’s

Continuing effects from the mining downturn and divergence in the non-bank sector are expected to affect delinquencies next year

Mortgage arrears to increase in 2018: Moody’s



Delinquencies underlying Australian residential mortgage-backed securities (RMBS) are expected to “moderately” increase in 2018, according to Moody’s Investors Service.

Analysts pin continued effects from the mining downturn and diverging lending policies between banks and non-banks as key factors behind this predicted trend.

“The balance of risks in new RMBS deals will also change, as bank-sponsored RMBS issued in 2018 will include a lower proportion of interest-only, high loan-to-value ratio (LVR) and housing investment loans, following regulatory measures to curb the origination of riskier mortgages,” said Alena Chen, Moody's vice president and senior analyst.

However RMBS issued by the non-banks will include a greater percentage of interest-only and investment loans than has been recorded in the past as these lenders have fallen outside of APRA’s regulatory remit thus far, she said.

“This will be partly offset with a lower proportion of alternative documentation loans and loans to borrowers with adverse credit history in the non-bank, non-conforming RMBS portfolios.”

While the overall credit quality of the RMBS market will remain strong, Chen said that there will be divergence between portfolios issued by bank and non-bank institutions.

“We also expect mortgage delinquencies in outstanding RMBS deals – as indicated – to increase moderately from their low levels because of the continued after-effects of weaker conditions in states reliant on the mining industry and less favourable housing market and income dynamics.”

With Western Australia and other states reliant on mining pushing up delinquencies this year, this will continue in 2018, Chen said.

These findings come from a recent paper released by Moody’s entitled, “RMBS, ABS and covered bonds – Australia, 2018 outlook – Delinquencies will increase moderately from low levels”.

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