Try as I might, I can’t find any reference in the Australian media (could be wrong) to a press release this afternoon by Moody’s warning of trouble ahead for the Australian housing market and a review of RMBS ratings. Thankfully in New Zealand they still seem to breathing (via Alex Tarrant at Interest.co.nz):
Sydney, July 26, 2011 — Moody’s Investors Service is undertaking a re-assessment of its rating methodology for Australian RMBS.
The review is taking place in the context of an examination of the risk factors affecting RMBS as well as the wider Australian housing sector.
Moody’s plans to outline its specific proposals in a Request for Comment in late August 2011. Once the comment process is concluded, Moody’s will publish the updated methodology and update the market on any implications for RMBS transactions.
We anticipate increases to Moody’s Aaa mortgage default probability and house price stress rate assumptions. Separately, Moody’s expects to modify its approach towards incorporating lenders’ mortgage insurance in Australian RMBS.
Here is the executive summary of the review:
The Australian residential mortgage-backed securities (‘RMBS’) market’s performance has to date been positive, with low underlying mortgage default rates and minimal house price declines. However, the wider housing sector remains characterized by the substantial price run-ups and household indebtedness growth over the past two decades. The experience of other countries shows that housing crises may occur notwithstanding good prior performance.
In this context, Moody’s is undertaking a re-assessment of its Australian RMBS methodology. We plan to outline our specific proposals in a Request for Comment in late August. We anticipate increases to Moody’s Aaa mortgage default probability and house price stress rate assumptions. Separately, Moody’s also expects to modify its approach towards incorporating lenders’ mortgage insurance in Australian RMBS.
In this note, we examine the risk factors for Australian housing and RMBS underlying our review. In particular, we examine the likelihood and potential severity of any stress that may affect RMBS ratings. Since these are typically Aaa, we focus on severe, tail-end risks. We do not consider the base case or make forecasts in relation to the immediate trends in the housing sector.
While we believe that the probability of a severe crisis remains low, a degree of caution in analyzing the future performance of Australian mortgage portfolios may be warranted:
- Australia’s economic growth is increasingly driven by favorable terms of trade. However, the commodities-led structural transformation that the economy will undergo over the next two decades implies both winners and losers, with certain industries and geographical regions coming under significant pressure. As a result, default and delinquency rates in the mortgage market are likely to be variable and, in our view, on average higher over the coming decade than in the past.
- The data with regard to the sustainability of Australian house prices are ambiguous, with the run-up in prices over the past decade only partially explained by fundamentals. We consider the possibility of major regional house price drops to be a material risk for the Australian market.
- Elevated mortgage debt levels point to vulnerability within the Australian financial system. The mortgage market’s robustness to an adverse economic shock has not been tested at current levels of indebtedness, with the recent experience of other countries positing some questions in this regard.
That sounds reasonable enough to me. Either the reputations of the world’s largest ratings agencies are so tarnished as to be no longer newsworthy, or Australian media denial just reached some new, ignominious peak. Perhaps both.
Full report below.