Mortgage arrears rise for self-employed and credit impaired borrowers: Fitch
Mortgage arrears among prime borrowers remained stable in the first three months of 2013, helped by low interest rates, the latest Fitch Dinkum Index shows.
Fitch records a negligible 2 basis point rise in prime mortgages more than 30 days in arrears rising from 1.46% in the December quarter of 2012 to 1.48% in the first quarter of 2013.
Fitch also notes that loans between 30-59 days arrears were at 0.59% up from 0.55% in the December quarter, making it the lowest post-Christmas level since March 2006.
An increase in 30-59 days arrears in the first quarter is anticipated each year because the serviceability of Australian borrowers is temporarily affected by the holiday season and Christmas spending.
The figures are based on Fitch's analysis of mortgages bundled and sold by lenders to investors as residential mortgage-backed securities (RMBS).
However, of concern will be the rise in arrears for both the self-employed (low-doc loans) and those with poorest credit ratings (non-conforming low-doc loans).
Fitch records the proportion of non-conforming loans more than 30 days in arrears increased from 11.99% to 12.76% while low-doc loans arrears increased from 7.05% to 7.57%.
The graph below shows the stable low-arrears rates for prime mortgages (blue) and rising arrears rates for low doc and non-confirming loans (brown and green lines).
Click to enlarge
"Self-employed borrowers are still experiencing financial distress and finding it difficult to cure their arrears," says Iselle Gonzalez, associate director at Fitch.
"Historically, low-doc borrowers have taken longer to adjust their spending and cure arrears due to the lumpy nature of the cash flows; Fitch believes this will continue."
According to Fitch, low-doc performance, can be an early indicator of financial distress among borrowers who do not have a stable income and are therefore sensitive to volatility in the economy.
Fitch explains that non-conforming mortgage lending standards do not meet the standard lending criteria of mainstream lenders and include lending to borrowers who have poor credit or payment histories. As a consequence non-conforming transactions tend to have high levels of delinquencies and defaults.