The latest Fitch Rating fair dinkum report is out in what looks to be a few more streams of sunlight for the economy. Arrears on RMBS are still high by historic standards, but flat interest rates look to be providing some stability.
Fitch Ratings said that the decision by the Reserve Bank of Australia (RBA) to keep cash rates unchanged since November 2010 is expected to continue to positively impact mortgage performance in Q311, after providing a certain degree of relief to borrowers in the previous quarter. The Fitch Dinkum 30+ Days RMBS Index, which tracks 30+ days delinquencies in the Australian prime RMBS sector, decreased to 1.69% in June 2011 from the record high of 1.79% in Q111.
“The stable mortgage rates over Q211 have allowed households to slightly adjust to the challenges which hampered mortgage performance during Q111, such as increasing interest rates, natural disasters, and seasonal Christmas spending,” said James Zanesi, Associate Director in Fitch’s Structured Finance team.
“Mortgage performance is also expected to continue its stabilisation through Q311 as the effect of Christmas spending continues to pass through, borrowers affected by natural disasters in Q111 continue to cure their delinquency status and households adjust their spending to the increases in mortgage rates over the last two years,” added Mr. Zanesi.
Fitch notes in particular that, in line with expectations, the decrease in arrears was mainly in the 30-59 days and 60-89 days buckets, which were also the buckets in which arrears increased the most during Q111. The Fitch Dinkum 30-59 Days RMBS Index and 60-89 Days RMBS Index decreased to 0.71% and 0.31% in Q211 respectively, down 8bp and 3bp from Q111. However, the Fitch Dinkum 90+ Days RMBS Index (the Dinkum 90+) increased marginally to 0.66% in Q211 from 0.65% in Q111. The increase in 90+ days arrears is still in line with expectations, as not all borrowers in arrears by one or two months in Q111 were expected to cure their delinquency status through Q211.
Certain borrowers (eg low-documentation, self-employed) remain under pressure when making mortgage payments. Although in Q211, Fitch’s low-documentation Dinkum Index shows that 30+ days delinquency rates decreased to 6.55% from 6.74% in Q111, the current levels are still high. Specifically, the 30+days delinquency rate for prime and non-conforming low-documentation borrowers were respectively 5.38% and 15.83% in June 2011, down 7bp and 105bp from Q111. However, the 90+days arrears for prime low-documentation borrowers are currently at 2.72%, which is a record high, suggesting that prime low-documentation borrowers are finding it difficult to cure their delinquency status.
Covering four categories of delinquencies (30 to 59 days, 60 to 89 days, 90+ days and 30+ days) for full-documentation loans and low-documentation loans (both conforming and non-conforming), as well as claims against lenders’ mortgage insurance, the Dinkum report enables market participants to compare the performance of Australian mortgages and monitor trends in the market.
Let’s not forget the share market has continued to slide into the Q311 and we have also seen a recent uptick in unemployment which I expect to continue. But, even so, this is good news for the economy and also for the RBA as it releases just a little bit of downwards pressure on rates in the short term. Fitch ratings seem fairly optimistic about the strength of the Australian mortgage market over the next couple of quarters, but you will note that their outlook is full of all sorts of caveats.