The support for mortgage holders over the past 18 months has been extraordinary. From suspended interest payments to cratered fixed interest rates, the worst of times was suddenly transformed into the best of times for the most leveraged.
But those concessions are now ending as the RBA’s TFF rolls off and fixed rates rise. Plus banks get that little bit meaner to the stressed. Fitch sees stress coming:
Seasonal Arrears Increase: 30+ day arrears rose by 4bp qoq to 1.05% in 1Q21. Historically, arrears increase in the first quarter due to Christmas spending. This is the 14th occurrence where firstquarter arrears were higher than fourth quarter since 2005.
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End of Deferrals May Raise Arrears: Australian lenders provided payment holidays to borrowers struggling with the economic fallout from the coronavirus pandemic, ensuring arrears stay low. The regulator said that deferrals of up to 10 months, ending no later than 31 March 2021, do not need to be treated as arrears. As a result, arrears performance has been relatively stable in the last year.
However, Fitch Ratings expects the Dinkum index to increase as the payment deferrals have ended and government support measures, like JobKeeper, have been rolled back.
Pandemic Worsens RMBS Outlook: The pandemic and related containment measures resulted in Australia’s first recession in almost 30 years. We expectthe impact to vary by geography and RMBS sub-sector, but asset performance across Australian RMBS is likely to deteriorate through 2021, as reflected in our worsening outlook on the sector.
Home Prices to Increase: Home prices across Australia’s eight capital cities increased by 5.6% qoq, the largest quarterly increase in more than a decade. Fitch expects home prices to continue to rise in 2Q21, supported by record low mortgage rates, a recovering economy and government incentives for housing, particularly for first-home buyers.
RMBS Performance Remains Robust: Fitch-rated RMBS transactions continue to experience extremely low levels of realised losses. Excess spread was sufficient to cover principal shortfalls on all transactions in 1Q21. Fitch expects excess spread to reduce in 2Q21, as more borrowers fall into arrears, but the recent recovery in property prices should prevent rising losses if borrowers default.
I really can’t mount much of a case against this. Defaults will rise but the levels remain very low.
Let the good times roll.