Australian RMBS arrears set to rise

Fitch Ratings has observed a stabilisation in the Australian Residential Mortgage Backed Securities (RMBS) market in Q210. Fitch's Dinkum index, which tracks the level of arrears across all Fitch-rated RMBS, has shown that 30+ days delinquencies decreased to 1.32 per cent in Q210, from 1.38 per cent in Q110.

In general, Q210 delinquencies in the prime and low-doc sectors stabilised across all segments and buckets (30-59 days, 60-89 days and 90+ days), although they remain at levels which are overall higher than in Q409.

This improvement in performance comes despite three consecutive hikes in cash rates by the Reserve Bank of Australia (RBA) ending in May 2010. This might, however, prove to be only temporary.

The three consecutive cash rate hikes by the RBA during the second half of 2009 contributed to a peak in arrears in Q110, with the same likely to occur in Q310.

Fitch believes that as households struggle with higher mortgage payments, an interest rate shock is likely to occur, leading to a higher level of arrears in the third quarter of this year.

Low doc borrowers are particularly susceptible to mortgage delinquencies.

Generally, interest rate shocks tend to have a rather temporary effect on delinquencies, which then tend to stabilize as households adjust their spending.

A long-term impact is rather unlikely as Australian households are currently bearing a standard variable rate (SVR) that is still lower than long-term historical levels.

However, if the RBA decides to continue a tightening of monetary policy, SVR might return to pre-crisis levels, in turn affecting borrowers' affordability.

the September 2010 monetary policy meeting, the RBA considered the current cash rates appropriate, although higher interest rates might be required in order to maintain inflation at target levels in the medium term.

Should this be the case, the level of arrears will depend on households' swift response to the new cash rate.

AUSTRALIA UNDERGOES STRESS TEST ON PROPERTY PRICES

Fitch Ratings has announced it will analyse the sustainability of Australia's housing market by putting it through the rigors of a stress test.

According to Fitch managing director Ben McCarthy, the test will use different scenarios of varying property price declines to ascertain the possible effect a rise in mortgage defaults and fall in prices would have on the ratings of Australian residential mortgage backed securities (RMBS), banks and mortgage insurers.

As a part of the analysis, the company will also review its criteria and assumptions for rating Australian RMBS.

"Over the last few months, Fitch has received numerous enquiries as to the sustainability of Australian residential property prices and the possible impacts of a correction," Mr McCarthy said.

"Fitch sees such scenario analysis as an important way of testing the robustness of our ratings should such a downside risk occur, and will help to inform the review of our ratings criteria," he said.

The property analysis will involve scenario testing on: a mild, medium and severe mortgage stress. Fitch expects to publish research showing its findings in mid-Q4 2010.