S&P slaps the Australian mortgage linchpin on downgrade watch

No worries, mate:

On March 20, 2017, we revised our rating outlook on Genworth Financial Mortgage Insurance Pty Ltd. to negative from stable (see “Genworth Australia Outlook Revised To Negative From Stable; Ratings Affirmed At ‘A+'”). In this article, S&P Global Ratings addresses the current and potential issues the outlook change could have on its ratings on Australian and New Zealand structured finance transactions.

Frequently Asked Questions

Will the outlook change on Genworth Financial Mortgage Insurance Pty Ltd. have any immediate effect on structured finance ratings? No. Structured finance instruments typically do not carry outlooks and so there is no accompanying outlook change. The underlying credit rating for Genworth Financial Mortgage Insurance Pty Ltd. remains unchanged, at ‘A+’, and there is no related change to structured finance ratings.

How exposed is the Australian and New Zealand RMBS portfolio to Genworth Financial Mortgage Insurance Pty Ltd.? By number of transactions, about 88% of residential mortgage-backed securities (RMBS) transactions in Australia and New Zealand are exposed to lenders’ mortgage insurance (LMI). The two major LMI providers in these markets are Genworth Financial Mortgage Insurance Pty Ltd. and QBE Lenders’ Mortgage Insurance Ltd.

Genworth Financial Mortgage Insurance Pty Ltd. insures about 25% of the loans, based on current loan balance outstanding, that underlie Australian RMBS transactions, as of Dec. 31, 2016. In New Zealand, the exposure is about 4%.

RMBS exposure to LMI has declined in recent years. We expect the trend to continue as issuers move to reduce the ratings dependency risk caused by LMI exposure. It also reflects a general shift in mortgage lending away from higher loan-to-value loans, for which lenders have traditionally obtained mortgage insurance protection. How exposed are Australian and New Zealand RMBS ratings to a lowering of the ratings on key LMI providers?

Any deterioration in the financial strength of LMI insurers could affect RMBS ratings. Our ratings on subordinated notes would be most vulnerable. However, most ratings on currently outstanding senior ranking notes have moderate to low sensitivity to LMI provider downgrades because they have extra credit enhancement in the form of subordination. As a result, not only do these notes usually have ratings that are higher than the financial strength ratings on relevant insurers, but they also often have extra credit enhancement that provides a buffer for them to withstand certain levels of LMI provider downgrades. Rapid portfolio amortization has raised credit support as a percentage of outstanding balance. A general net improvement in the creditworthiness of the housing-loan portfolios that underlie RMBS has strengthened our ratings on most senior tranches and made them better able to withstand a potential downgrade of the LMI providers. The improvement in credit quality is due to a general deleveraging by borrowers during a period of lower mortgage rates and greater seasoning of the portfolio.

A relatively strong LMI claims-payout record has also helped support ratings stability. The longer a transaction is outstanding, however, the longer it is exposed to economic cycles and related stresses. Current macroeconomic conditions are relatively benign, and we do not anticipate any rise in claims adjustments. We monitor this risk through regular reviews of originators’ claims-adjustment assessments.

Does the change to our outlook on Genworth Financial Mortgage Insurance Pty Ltd. change the estimate of claims payout ratio and Categorization of Insurer and Lender Practices? No. The assessment for estimating the claims pay-out ratio is based on four qualitative factors: historical claims-adjustment experience, the nature of adjustments, the variability and actions taken to minimize future claims adjustments; the origination practices and procedures of a lender and its competitive market position and degree of market influence; the servicing practice of insured loans and its alignment to insurers’ expectations, and the degree of ongoing communication with insurers; and the clarity of the LMI policy and the extent of policy exclusions. We have not observed any material changes to these factors that would lead to a change in this assessment. The two main LMI providers in this market remain consistent with “CA1” outcomes, in line with our “Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds” criteria, published Dec. 7, 2014. 

All good. Last I looked it only had a leverage ratio of 130x.

Comments

  1. If banks risks can be reduced via LMI, if the LMI is no good what happens to the risk the bank supposedly offloaded?

    You cannot downgrade the insuring company without the risks increasing for those being insured.

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