S&P warns on Aussie mortgage bonds

From S&P:

– Tightened access to credit will affect refinancing conditions, but not for all borrowers. Borrowers with modest loan-to-value ratios, higher seasoning, and amortizing loan profiles are in good stead. Such borrowers make up a majority in most Australian RMBS portfolios.

– We expect mortgage arrears to remain low in most portfolios, with modest rises mainly being driven by increases in interest rates, provided employment conditions remain stable.

– Falling property prices pose a greater risk for the lower-rated tranches of less-seasoned transactions, particularly for loans underwritten at the peak of the property cycle.

Falling property prices triggered by tightened lending conditions are dominating Australian media headlines. The Australian residential mortgage-backed securities (RMBS) sector so far has been relatively resilient to pressure, with mortgage arrears remaining low and ratings performance stable.

The RMBS sector is now facing more elevated risk than it was 12 months ago. Alongside high household debt and low wage growth are emerging risks such as lower seasoning levels in new transactions and increasing competition.

Digital disruption is set to change the competitive landscape in Australia, with comprehensive credit reporting (CCR) and Open Banking on the doorstep.

Stakeholder expectations are also altering credit profiles, with regulators now the dominant force shaping underwriting decisions. The RMBS sector is well placed to weather disruption and economic change, but there is no room for complacency.

Poor macro analysis as usual. Things will be worse than that next year. What also struck me was the chart. If the non-banks are supposed to be picking the major bank’s slack then why is RMBS issuance tanking given it is their primary funding mechanism? The major banks use it as well but the fall year on year is very large and suggests that the problem is now waning demand.

Comments

  1. 3 month BBSY is the highest it’s been for a while, 1.94%. Rates are normalising despite the RBA.

  2. Borrowers with modest loan-to-value ratios, higher seasoning, and amortizing loan profiles are in good stead. Such borrowers make up a majority in most Australian RMBS portfolios.

    Based on fake valuations and forged income doxuments

  3. Borrowers with modest loan-to-value ratios, higher seasoning, and amortizing loan profiles are in good stead. Such borrowers make up a majority in most Australian RMBS portfolios.

    Based on fake valuations and forged income documents

  4. Reason for the fall in issuance: New and better sources of funding from PE and other private sources. Not a tricky one. I mean there is literally nothing more to it than that. Wouldn’t waste any more time going down that line of inquiry unless you don’t want to have an existing view changed.

    Re: “Things will be worse than that next year.”: One thing to be careful of here is what I would assume is your underestimation of wage growth that is now all but inevitable, and specifically it’s ability to delay arrears even as prices continue to fall. Forget the last report and the breakdown of where growth came from: People are now starting to get *spontaneous* pay rises in the construction sector. There is quite literally a severe labour shortage in construction. The pipeline in mining and infra is now more than enough to offset the decline in residential (basically apartments). Go and talk to any big contractor about this and you’ll hear the same: They are worried about serious wage inflation and an inability to attract / retain workers. Drillers are running at ~75% capacity not because there isn’t enough work but because they cannot train or attract workers fast enough; you really need to do the work in this space.

    Re: IO refinancing issues: Amazingly all but solved. Hard to believe but it is what it is. Issue is more about the rates at which people can refi, not so much whether they can or not which was what I think we all thought was going to happen. In any case, the non-banks are basically gobbling up anything that comes their way.

    I know you’ve got a view but the can is getting kicked already by gov spending into the teeth of a mining maintenance capex surge. Commodities could come of ~30% from here and the spend would still largely *have* to happen (in fact it already is).

    The issue then becomes what happens ~3 years down the track as infra / mining capex tails off. The can is getting kicked by the labour market right now guys.

    I suspect that I’m going to get howled down here but I’m just saying what is actually happening on the ground. You’ll probably be right one day re: defaults but right now it’s just the price aspect of resi that is correcting (crashing in the case of Syd/Mel), not the level of indebtedness to any material degree. That problem may arise later.

  5. Lol. Dude: The financing reference was *not* re: developers but re: the actual non-bank lenders themselves. How can you not know this but opine with authority on the matter? Do you actually do any legwork at all? Or just keyboard it? The labour comment compounds it. You don’t want to have your mind changed. I understand, your livelihood depends on it. If you want to be right with your *own* account then I suggest you do a bit more work however. I give up. You want to throw around nonsense like “Rubbish” when you clearly don’t actually know what you are commenting about; no problem. Enjoy being wrong (for a few more years, on top of the past lots and lots of years you’ve been wrong for).