Arrears begin to tick up: Fitch Ratings

In its report “Mortgage Market Index - Australia: The Dinkum RMBS Index 4Q22”, the analysts wrote: “The Fitch Dinkum RMBS Index for 30+ day arrears was 0.82 per cent in 4Q22, up 11bp qoq but down 10bp yoy. 

“Meanwhile, 90+ day arrears were down 1bp to 0.38 per cent. 

“We expect late-stage mortgage arrears to increase in 2023, as borrowers face servicing pressure and the slowing housing market extends the time taken to sell a property.”

The credit ratings company noted that while the levels are marginally up — and typically increase in the final quarter of the calendar year anyway — the arrears rate is rising from its lowest levels since 2002 and is expected to do so in 2023.

“Historically, arrears increase in the fourth quarter, but this may also indicate that borrowers are beginning to face stress due to inflation and rising interest rates,” it said.

It added that its RMBS Index, which represents 24.9 per cent of Australia’s total mortgage market, includes large issuer-retained transactions and saw 30+ day arrears increase by 5 bps qoq to 0.61 per cent in 4Q22. 

Moreover, the 30+ day mortgage arrears for Fitch’s Non-Conforming Index rose by 160 bps to 2.96 per cent in 4Q22, compared to the previous quarter. However, it remains well below the record high achieved during the global financial crisis in 2009, when arrears climbed to 20.90 per cent or 15.5x current levels. 

“Thirteen of the 14 transactions in the 4Q22Fitch Non-Conforming Index experienced higher 30+ day arrears, which may indicate that non-conforming borrowers are beginning to face stress due to rising interest rates,” the report read.

“Low interest rates in the past and minimal unemployment have kept Dinkum 30+ day arrears muted, allowing borrowers to service debt, despite little wage growth. 

“However, arrears are sensitive to the recent interest-rate hikes, due to the high ratio of household debt/disposable income. Arrears may also be sensitive to inflationary pressure, especially if there is no corresponding growth in wages …

“Higher unemployment and underemployment could amplify loan-servicing pressure, increasing delinquencies and foreclosures.”

As well as noting a rise in arrears, the credit ratings agency also revealed that repayment rates were falling. 

“The Dinkum RMBS Index borrower payment rate (BPR) and conditional prepayment rate (CPR) decreased to 28.2 per cent and 26.0 per cent, respectively, in 4Q22, and remained below the 15-year high in 4Q21,” the report read.

Summarising, Fitch said it expects recent cash rate increases by the Reserve Bank of Australia to drive up arrears in 2023, due to the high ratio of household debt to disposable income and the dominance of floating-rate loans in Australia. 

“Fitch Ratings expects the Reserve Bank of Australia’s (RBA) cash rate increases to drive up arrears in 2023, due to the high ratio of household debt to disposable income, reduction in household savings and dominance of floating-rate loans,” it said.

“Mortgages written between 2019 and 2021, when banks tested serviceability using a buffer of 2.5 per cent above the borrower’s interest rate, are more susceptible to deterioration in performance, as the cash rate is now higher than this buffer.

“Fitch expects home prices to continue to fall in 2023 on affordability constraints and credit tightening. However, losses from the sale of collateral property should stay low due to strong home-price growth over previous years.”

[Related: RBA ups cash rate for 10th consecutive month]