Fitch: Australian Mortgage Arrears Stable; Conditions Improving

The Fitch Dinkum RMBS Index increased only 2bp to 1.17% in 1Q15, even though property market conditions in Australia are improving, with historically low interest rates, high house prices and a stable economy. The index tracks the arrears and performance of the mortgages underlying Australian residential mortgage-backed securities (RMBS).

In line with Fitch's expectations, Christmas and holiday spending pressures on mortgage performance in 1Q15 were offset by an interest rate cut by the Reserve Bank of Australia in February 2015 and the temporary fall in petrol prices. It is evident that arrears performance has reached its lower bound. Arrears have remained stable since 4Q13 when the environment started improving for borrowers.  
Low-documentation loans are primarily given to self-employed borrowers, whose incomes are more susceptible to economic downturns. As a result of income instability, delinquencies in this segment tend to be four to five times higher than that for full-documentation (full-doc) loans. The low-doc Dinkum Index worsened by 61bp to 5.44% in 1Q15.

The performance of non-conforming loans, which are usually provided to borrowers who have adverse credit histories or do not conform to lending criteria of Lenders Mortgage Insurer's (LMI) providers and mainstream lenders, have worsened in 1Q15. Arrears of 30+ days rose 88bp to 7.58% and repayment rates declined to 26.8% from 35.1%. However, 90+ days arrears decreased 26bp over the same period, in line with the view strong house price growth is still helping to cure serious arrears. 

Australian house prices rose 7.4% year on year in March 2015, with gains concentrated in Sydney and Melbourne. LMI claims have benefitted from the increase in property prices as it reduces the likelihood of a principal shortfall on defaulted loans. In 1Q15, the Dinkum LMI payment ratio was 95.3%, compared with 94% a year earlier, with an average 1Q15 LMI claim of AUD167,748, which is well above the average cumulative LMI claim of AUD73,874. Six claims over the quarter were at least double the average cumulative claim.

Uninsured mortgages in transactions issued in 2014 increased substantially. As a result, the uninsured mortgages' market share in 1Q15 increased to 25.2% from 18.1% in 1Q14. A sudden increase in foreclosures could result in higher losses as recoveries from LMI are reduced. 

Fitch expects arrears to remain low in the next quarter thanks to sturdy issuance volume, high house prices, stable unemployment and low interest rates. It is unlikely that there will be further improvements to arrears as borrowers unable to service loans in the current environment will face limited benefits from any positive movements in these factors. 

Current and historic Dinkum Index data is now available in Excel form for reference through the full report entitled 'The Dinkum RMBS Index - 1Q15', available at www.fitchratings.com