Lo doc loan arrears a concern for the industry

Conforming (mortgage insured) 30+ day delinquencies declined to 1.40 per cent in Q209 from 1.52 per cent in Q109. Overall, ongoing arrears stability suggests that peak arrears were reached in Q408 and are not likely to reach those levels again for the remainder of 2009.

Australia has fared better than most other countries during the global financial crisis but the influence of contracting global economies having a further impact on Australia remains a real possibility. The combined efforts of expansionary fiscal and monetary policy within Australia appear to have had a positive influence in sheltering Australians from the global storm.

The sixth cut in the official cash rate to 3 per cent in April 2009 by the Reserve Bank of Australia (RBA) has been effective in keeping many borrowers’ cost of funds at historical lows. The RBA indicated in its August 2009 Minutes of the Monetary Policy Board Meeting that it would, in due course, need to adopt a less expansionary policy stance – therefore, the next likely direction in interest rates is up.

The increase in arrears in the short-dated 30-59 day bracket to 4.87 per cent in Q209 from 4.45 per cent in Q109 for non-conforming reduced-documentation loans raises concerns for this segment of the market, which is primarily made up of self-employed borrowers. They are likely to be feeling the full effects of the economic downturn and related slowing and/or failure of their business ventures. Although the increase is relatively large, non-conforming reduced-documentation loans only represent a small segment of the securitised universe captured within the Fitch Dinkum Index*, being less than 0.10 per cent.

The usual spike in arrears from Q408 to Q109 due to Christmas spending and repayment of credit card debt did not occur due to a combination of lower interest rates and the first round of federal government financial support.

This support started on 8 December 2008 when the Australian government commenced payments to some two million eligible Australian families who received $1,000 per child. Additional one-off payments of up to $900 were made in March 2009, continuing through April 2009 for a further five groups, including 8.7 million eligible Australians earning $100,000 or less.

Losses, as measured by claims on lenders’ mortgage insurance (LMI), generally have increased however they remain extremely low. It is expected that the stress on borrowers who are able to maintain their current level of employment will reduce, with LMI claims expected to remain low in the coming quarters because of the relatively low level of arrears.

The next and final round of proposals for AOFM mandated transactions were due on 18 September 2009. As of that date, the AOFM had invested in 17 transactions to a total of $7.382 billion, leaving $618 million of the original allocation of $8 billion to be invested.

The remaining mandates will be issued to non-bank originators as the $4 billion specifically allocated to those lenders has not been fully utilised (to date only $3.453 billion has been invested by the AOFM in transactions sponsored by the non-banks). There has been no indication what, if anything, will replace the current program.

The Fitch Dinkum Index covers four categories of delinquencies (30-59 days, 60-89 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 and enables market participants to evaluate the performance of Australian mortgages and monitor trends in the market.