Fitch: mortgage arrears surge

Fresh from Fitch:

Fitch Ratings-Sydney-26 March 2012: Fitch Ratings said that delinquencies in the Australian prime RMBS sector have unexpectedly increased to 1.57% in Q411 from 1.52% in Q311 despite a stable environment in terms of interest rates, economy and unemployment. The increase in Fitch’s Dinkum Index was mainly driven by a rise in the 30-59 day bucket indicating that new borrowers are facing affordability constraints.

Moreover, the Dinkum Index understates the deterioration in Australian mortgage performance in this quarter as the inclusion of a large volume of recently issued transactions in the Q411 constituents has helped keep the overall index level low. The index would otherwise have jumped to 1.71%, not so far away from the 1.79% record high in March 2011. Fitch includes transactions in the Dinkum Index six months after they have been issued.

“It is too early to judge which factors contributed to the increase in arrears during Q411. To a measurable extent, declining house prices were the only key driver of mortgage performance to show a negative trend through Q411,” said James Zanesi, Director in Fitch’s Structured Finance team.

“Housing market stagnation might lead to arrears materialisation as the borrower who might otherwise have refinanced or repaid with sales proceeds falls into delinquency. Less seasoned and most leveraged loans are most affected by declining house prices” added Mr. Zanesi.

Fitch continues to forecast deterioration in mortgage performance in Q112 when it expects seasonal Christmas spending, in combination with minor increases in bank standard variable rates, to outweigh the benefits of the two cash rates cuts in Q411.

More susceptible borrowers such as self-employed households still face challenges in meeting their mortgage obligations as suggested by the Fitch Dinkum Low-Doc Index which recorded an increase in 30+ days arrears to 6.62% in Q411 from 6.26% in Q311. Fitch expects low-doc delinquency rates to remain high.

Although delinquency rates are increasing and are above the historical Australian average, they remain low relative to other countries and well within the expectations used to derive Fitch’s ratings for Australian RMBS transactions.

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.

I’m not sure how this can be couched as surprise but go figure. We’ll return with much more when we get the report.

David Llewellyn-Smith
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Comments

  1. reusachtigeMEMBER

    More proof that problems start within housing before moving into other areas of the economy. Don’t you just love all this “But what’s going on? Everything should be hunky dory because we have stable interest rates and low unemployment – it just doesn’t add up???”. It’s the house prices stupid and the huge debt to service them!!!

  2. Hopefully that should have been reversed with the recent rate cuts, and if the RBA take note of this data then together with pressure from retail it might encourage them to cut in April.

    Rate cuts don’t immediately reverse late or missed payments though, that takes some time, discipline, and usually a pay rise or a tax cut.

    Offsetting that can be fuel price rises, food, and other cost of living increases that can’t always be covered by stricter budgeting.

    It will be a difficult time for many people.

    • if people are hoping for and relying on interest rate cuts in order to make their mortgage payments as PF suggests rest assured the property market is goig much, much lower.

      still waiting to see any evidence of your prediction of a pick up in demand for mortagegs and houses PF? Stockland certainly dont seem be seeing it either. Maybe stockland are just “imagining” the housing downturn as well?

      Peter Fraser says: March 23, 2012 at 10:47 am I’m in the camp that believes the housing market is stronger than all here imagine

      • Hi GB,

        Stockland sell new homes – I don’t see any pickup for new homes. They will languish for some time. I’m not a stock picker but I would be concerned for the short term (up to 5 years) if I held their shares.

        I expect that the ABS data will show a slight uptick for the months of March and April but go a little lower in May.

        That’s based on current or very recent sales activity and expected settlement times. If every mortgage settled in exactly 30 days the forward numbers would be much easier to predict, but as you will appreciate settlement get delayed or contracts are drawn for a 60 day settlement etc and so it gets a little fuzzy, but I’m sure you will get the over all picture from that.

        How are the shares going?

      • GB,

        I don’t think people talking up housing here really believe in what they say. Sure as insiders they have to; but such arguments are always laced with obfuscations and are devoid of any backing data and logic. Methinks they may even get paid per the words they post on such fora.

        • coolnick,

          Thats simply not true, I did at the time support my assertions with some fact and logic. The fact that you and GB didn’t read it is not my concern.

          • sorry PF i didnt see any logic in your assertions. my copy and paste of your comment is proof i did read it.

            P.S despite your claims to the contrary new and existing home sales ARE related.

          • Gb – what you copied and pasted was not my explanation, it was merely a statement.

            In that thread I gave a more detailed explanation of how I arrived at my assertion. I’m not going to copy and paste it everywhere so you can find it in that thread yourself.

            Feel free to comment on it.

            On the new homes/existing homes correlation, look at the complete fall of in new home construction in the USA for some guidance. At this phase in the cycle new homes will slow right down. It’s just what happens.

          • PF: “In that thread I gave a more detailed explanation of how I arrived at my assertion.”

            In the same thread, so many commentators have shown how you were wrong Peter. Your arguments simply defied the laws of arithmetic and if you are still sticking with that, you better make a claim for Nobel Prize—it might just work.

            There is nothing wrong in making a mistake—everyone does. But as many have pointed out clearly before, you wrongly manipulated the data in that report to support your claims. If you continue, soon you will need to find something else to spruik about since people are fast catching on.

      • if people are hoping for and relying on interest rate cuts in order to make their mortgage payments as PF suggests rest assured the property market is goig much, much lower.

        +100 . I doubt even Peter Fraser would disagree with that sentiment. :p

        A few rate cuts in a 30 year timeline is like a drop in an ocean. Why the hell do people not even account for fluctuations in rates before they load up on debt. And are the banks/lenders being responsible, lending to people who can’t make ends meet even when rates are stable?

        • Well mav apparently 98.43% of borrowers are not relying on a rate reduction, as they are up to date with their loan.

          That said, it is obvious that the market is rate sensitive.

          • If the market is sensitive to a minute 0.25% change in interest rates, then IMHO there is something wrong with the market.

            Also, note that this 98.43% non-delinquencies is in the Australian prime RMBS sector, a tiny sliver of the mortgage “market”,

            This sector was non-existent after the GFC and is on life support assistance from the taxpayers ever since. So the figures from this sector won’t capture the result from the FHB feeding frenzy cohort at the top of the market. So the figures for the broader market are likely to be worse off.

      • Peter Fraser says: March 23, 2012 at 10:47 am I’m in the camp that believes the housing market is stronger than all here imagine
        Sorry but what exactly “stronger” means in this context? The swindle/con job is stronger than in other places? The same with “fundamentals are stronger here” . The same question? What fundamentals are you people talking about? The fundamental right to participate in a Ponzi scheme, to go in debt for the rest of one’s lifetime ? To me is like saying to some unfortunate people in Nigeria not to worry about the price of a loaf of bread being so high as the fundamentals are right. There was no much rain last year, plenty of civil unrest, and the elephants have just ate half of the crop. So it will stay high.
        Peter I would very much you call a duck a duck. I’m displeased of you people calling an abnormal situation where nothing is really right “stronger” or “stronger fundamentals”. Unfortunately you may be right when you say that the high prices may not come down as fast as they should. That is your opinion and I have nothing against that. The spin of normality though that you wish to paint the whole circus into is quite disturbing to me at least.

        • vonZetty – I’m not spinning normality.

          Did you read my full explanation in that thread, or did you just puppet GB.

          I’m certainly not predicting house price gains, just stating what I can see in the market at the present time.

          But if you prefer to remain uninformed then don’t read my posts.

    • “It will be a difficult time for many people.”

      particularly those who have been loaded up with mortgage debt by their bank / broker.

    • PF even if the RBA lowers its rate’s that does not mean the banks will, in fact the banks may rise rates to try offset losses such as BOQ may need to do to account for the slide in values of homes.

      The RBA is a toothless tiger these days. It’s banks who set the real interest rate now, not the RBA.

      And the unemployment numbers from the government are a laugh, better to look at Roy Morgans unemployment figures for a more realistic report. You will find that many also working have had hours and pay cut back. It all leads to mostly a slowing economy. Why do you think Mike Smith from ANZ is trying to assure the Asians in Hong Kong that property is still a safe investment, they are all getting worried and a mass exit of their investments which I expect to happen will be the pin in the hand grenade (is that even a real saying? pin in the hand grenade haha).

      • bskerr2 – I will share some info with you. Those Bank of Qld impairments are 100% in their NON HOUSING book.

        So you can forget the “canary in the coal mine” idea.

        However on whether or not the RBA still has power over the rates, you might be right. Lets wait and see.

    • russellsmith55

      Hi Peter,

      Even though I generally disagree with your stance on Australian housing prices, I do like to read your comments (personally I don’t see any price recovery soon unless a temporary/artificial one gets engineered by the spruikers).

      I’m always interested in the opinion of people who can disagree in a respectful and logical way, and your posts often do this (before someone attacks you).

      Your profession puts you in a unique position compared to most of the commenters and it makes me interested in what indicators you watch to inform your decision. Even if your points don’t change my mind, it gives me a better understanding of how you formed that opinion.

      Maybe we could all be nicer to Peter 🙂 I think MB would be worse off if all we did was agree with each other that our economy stinks without adding any new viewpoints to the discussion.

      • +1
        I wouldn’t want to see PF gone from MB. Balanced & civil discussions are always a good thing.

      • Hi russellsmith55 – thanks for the kind words. I really don’t mind a bit of argy bargy, but it does get tedious when it is trivial, personal and petty, but some jibes are actually quite amusing at times.

        I’m actually not preaching high increases in house prices. There has been more activity just lately which will help push prices marginally higher, but now it’s starting to taper off again, and I wouldn’t expect it to pick up without a rate reduction.

        So my predictions are for only small adjustments, and I would have thought that everyone would accept that whatever the long term trend it would not travel in a straight line.

        I’m quite amazed at the fuss that it has created.

  3. “Less seasoned and most leveraged loans are most affected by declining house prices”

    that would be those poor young australians that got sucked into the top of the market by the FHOG. 37% of which are now in negetive equity. those that used the grant as deposit and therefore didnt put any equity in should just default now. they should never have been given grants and loans in the first place.

  4. Its funny how my lecturer continues to preach that the “economy” is the leading indicator for the housing market but its actually the other way around. When housing is bigger than our combined super, mining industry, finance industry and share market leads can only lead to:

    “if the housing market sneezes the rest of Australia gets a cold”

  5. The most important paragraph is:

    Housing market stagnation might lead to arrears materialisation as the borrower who might otherwise have refinanced or repaid with sales proceeds falls into delinquency. Less seasoned and most leveraged loans are most affected by declining house prices

    Something about tides and naked people….

    • This is such an obvious point that it’s amazing it is ignored by some many people including the RBA when they ramble on about how our arrears are so much lower than the US.

      Of course arrears are low when house prices are rising – you can always sell your house and pay off the mortgage if you run in to trouble. Let’s see what happens now that house prices have been dropping for a while.

      • The boom has just gone on for so long that it is so easy to miss the obvious points.
        In my inner-city area, prices are down $100k plus from 2009, despite what the SMH will tell you. It’s pure FHB properties that I am referring to, but of course nobody talks about it.

      • Well I think I have made it fairly clear over the last year that this sort of thing was a major worry to me given the link between credit issuance and house prices.

        As I said here

        http://www.macrobusiness.com.au/2011/08/analysing-household-risk-in-the-somp/

        There is no way banks were going to see large increases in defaults in a rising market, anyone in financial trouble has been able to sell their property for a higher price, pay down their debt and move on with their lives. Even those who have recently been in financial trouble have been able to access hardship assistance which would have given them time to sell their house if need be. It is when the market begins to fall that the potential for trouble begins.

    • DE – yes that is really what caused the crash in the USA – but lending here was tighter, so there should be more “robusta” in the mortgage books.

      • PF: “DE – yes that is really what caused the crash in the USA – but lending here was tighter, so there should be more “robusta” in the mortgage books.”

        Can you back this up with data Peter, it would be really interesting to see that and put an end to this silly discussion that questions Australian lending criteria.

        • data on what coolnick, that the crash in the USA was caused by loose lending, or that our lending here was tighter?

          If it’s the latter would n’t you say that with higher rates here and lower arrears, that is self evident.

          I will also add for your consideration, that it isn’t the FTB’s who are the main arrears problem. They are a fairly stable group due to the low loan size.

          • Tighter lending….Pffft!!! pull the other one Peter.

            I know of numerous people who have been given finance to buy/build and they are barely getting by even renting a dog-box.

            PF: take off the rose coloured shades and stop talking your book.

          • “FTB’s They are a fairly stable group due to the low loan size.”

            We need to put all your quotes into a book and sell it at the comedy festival.

          • Christiaan,

            I’ll happily take anecdotal evidence to a degree, but anyone can make up these BBQ stories, so a little evidence would be good.

            Do you have some stats?

          • Stay on the topic Peter, play nice. I asked you if you can provide the data for supporting your assertion that “but lending here was tighter, so there should be more “robusta” in the mortgage books. ”

            This is a simple question Peter, with a simple answer in the form of yes or no. Sure you can answer that without obfuscating anymore.

          • Coolnick there is ample evidence from many sources including te RBA as I recall, but the best evidence is the arrears and foreclosure rates.

            Sure they may increase, but will they get to USA levels?

          • Most people compare default rates which IMO have nothing to do with how “loose” the lending is. Houses need to be falling to see this correlation normally as people can use equity and/or pay their mortgage on the credit card, or sell up knowing capital gain will save them somewhat.

            Rather you need data as to the lending criteria of US citizens – (in terms of income) relative to the amounts and income here. I would argue just because of the house price to income ratios that the US was probably better than ours.

            Too much data – average equity in the home for the marginal mortgagee, LVR’s, credit card mortgage payments, house price appreication. I haven’t really ever seen a great analysis on this done.

    • Precisely what was seen in the US with the subprime borrowers.

      had prices continued to rise they would have been able to refinance and enjoy new honeymoon rates. That was the assumption anyway. When prices flattened it destroyed this cohort.

      High LVR and negatively geared loans here arent much different; particularly negatively geared properties in fact. The purchasers is relying on future price increases to deliver profit, and they are incurring realised losses through insufficient cash flow. If prices stagnate they must decide to either keep incurring losses or sell up.

      That for me is the trigger for further declines; when a proportion of investors or high leveraged owners decide that they can no longer rely on price rises and must sell up.

      Negative gearing negates any supposed high lending standards we have, as it has created a loss-making cohort of investors.

  6. BOQ has raised cash to deal with this issue. How long until Megabank needs to tap the market. Arrears at 2% -3 % ?
    Mr Deep T I would appreciate a response I really want to short Megabnk before the Feds go and ban short selling again.

  7. (I put this on the other H&H post, but this is where the action is)

    ‘No obvious cause.’

    What? WHAT??

    Land prices are THE cause. High land prices paralyze young adults – ably assisted by HECS, compulsory super and a poor labor market.

    We are in a Mexican Stand-Off. Any FHB who can add a column of figures or has read a little economic history knows homebuying at these prices is signing up for an entire lifetime of after-tax interest-bearng debt. Pass.

    See: http://www.heraldsun.com.au/business/barefoot-investor/home-ownerships-like-champagne/story-e6frfim6-1226308680684

    Sadly, they turn away to more education, travel, conspicuous consumption or sharemarket investment (their rampant promiscuity has surprisingly little economic impact).

    Supply exceeds demand and land prices start to fall, incentivizing FHB’s to stay in pause mode.

    We know those 90 days in arrears will almost all fail. This is a salutary lesson to FHB’s, when they see friends and colleagues lose thir homes. Who wants to live their entire life 90 days from bankruptcy?

    Don’t Buy Now!

    • Thanks for coming over to “where the action is”
      David I was wondering has your group done any work on how much houses would need to fall before the average man can afford to buy an average house and bring up a family without having to send Mum back to work 3 days after giving birth and the offspring spending then next 4 years of life in institutional care ?
      When I was growing up we lived in a below average area the old man was a Teacher but with three kids we seemed to have a nice life without Mum working. I cant imagine how much someone would need earn to have that now.
      I think a median price of $150K may do it

      • There are several ways to measure this.

        1. Mortgage repayments assuming a 20% deposit should approximately equal rents – disregarding rates, insurances, depreciation and repairs. I think we will overshoot this, as the US has done. See: http://pragcap.com/rent-to-own-shows-the-buy-high-sell-low-mentality-of-investors

        2. Property prices ought be 3 to 4 times wages. they are currently between 6 and 9 times, depending on which measure you use. See: http://www.demographia.com/dhi.pdf

        The fun part of this is price rises and falls are of the LAND component. Structure prices reflect building costs and move very little (they do depreciate).

        The Land Values Research Group forecasts a halving in land prices over ~5 years, of which a year has already passed. That means big falls in prestige property where the land component is very high (85%) and agonising, wealth-destroying falls in dormitory suburbs (plus the 5 years’ structure depreciation).

        We may well see houses in middle suburbs at $150k. That will really hurt existing mortgagees and the economy will be most unwell.

      • boyracerMEMBER

        “Moreover, the Dinkum Index understates the deterioration in Australian mortgage performance in this quarter as the inclusion of a large volume of recently issued transactions in the Q411 constituents has helped keep the overall index level low. The index would otherwise have jumped to 1.71%, not so far away from the 1.79% record high in March 2011.”

        Possibly this paragraph??

        • Wouldn’t there always be recently issued transactions included? How much larger is the “large volume” of such transactions in Q411 than the norm? Unless these questions are answered, that paragraph doesn’t advance the cause of “surging” much.

          • boyracerMEMBER

            I would think it is important otherwise why mention it?

            However I agree some more info to give it context would be good.

            I’m also not disagreeing or agreeing about the use of the word “surge”.

  8. Here is a fact that I forgot to include, I am just sitting and waiting to buy a house (that is after the big crash of 1929, opps, I mean 2012) Ozy homeloans calls me every few months to ask if I am ready. I say nope, call me back but i have a chat with the guy to get updates. The last time I talked to him was about 2 weeks ago, his words were when I asked if prices are dropping “Yes, people have an unrealistic expectation when selling homes now”, a few examples he gave were “people wanting 400K for their home when the value after been valued was more around the 300K mark” he gave a few examples but it goes to show that what people want in selling a home and what they will most likely get in the current market are really two different things.

    The other thing I would like to see MB do is an article on the population movements because WA is heating up with more people going over there, thus the tight rental market but those people are coming from where, mostly VIC, NSW and QLD which would mean vacancies should increase and housing prices should decline faster as this movement goes on. This would have to take into consideration people coming into and out of the country but I was talking to an agency this morning about a contract role over there for myself and he said more people are going over there.

    So I don’t expect housing and rental to get better anytime soon in QLD/VIC/NSW. If anything it should all slide a lot more.

    Still waiting for the PIIGS nations to crash. Then see what happens.

  9. Diogenes the CynicMEMBER

    Perth’s rental market is pretty tight and is starting to make people consider buying again. My cousin took 8 weeks to find a rental and kept turning up to home opens with 50 other people.

    On the other hand out of 75 homes on my street 10 were on market (with signs out front) in Jan, only 4 are on market now, only 1 has a sold sign on it.

  10. Jumping jack flash

    Watch out for mortgage fatigue.

    Once the young and indebted start questioning the point of handing over the majority of their income for a decaying house, it’s over.

    Or worse, paying for a house worth less than the value of the debt.

    The young can fairly easily chuck it all in and start again, if required. A friend of mine did this two years ago. He was 23 and his wife was 19. They had a whopping 330K mortgage. She got pregnant and while they could afford the payments, just, they didnt want to. They walked away and let the bank sort it out.

    The banks really need to start an advertising campaign about embracing your mortgage. Something catchy and appealing to Gen Y’s and younger Gen X’s.

  11. “The banks really need to start an advertising campaign about embracing your mortgage. Something catchy and appealing to Gen Y’s and younger Gen X’s.”
    Yes maybe MB could run a contest ?
    “How about Serfdom rules”
    Any others ?

  12. Booboo Bingbang

    Hey – New index – The PFPIMB – daily index that measures the number of housing positive comments “poor” Peter Fraser posts in MB each day – mostly in response to the gloomy MBers – the higher the index the worse the market seems to get.

    Today’s Daily PFCIMB looks like its going through the roof – in double digits and its not even “knockin’ off” time.

    • hahahahaha, +1million.

      I am amazed some people here still believe that PF adds to the quality of the discussion here. MB should be open to all kinds of thoughts, but there should be a bare minimum requirement that one should argue one’s case based on logic and not on deception. Last couple of days he has been caught red-handed.