Australia RMBS mortgage defaults to rise slightly in 2016: Moody's

Delinquency and default rates for Australian residential mortgage backed securities (RMBS) and asset backed securities (ABS) will rise slightly from their current low levels in 2016, due to slower economic growth and a rise in unemployment, says a recent report by Moody's Investor Service. 

The credit quality of the mortgage collateral for new RMBS issued in 2016 will deteriorate when compared with 2015, the report says, due to the inclusion of a greater proportion of riskier housing investment and interest-only (IO) loans and mortgages originated during a period of low interest rates and rapidly rising house prices.

The report noted investment and IO loans are riskier than owner-occupier and principal and interest (P&I) loans because they have higher loan-to-value (LTV) ratios, a key default driver.

Additionally, IO loans amortise slower compared with P&I loans, if at all, and therefore build equity at a slower rate, resulting in a higher loss upon default.

The analysts at Moody's also expect more RMBS deals to reduce their dependence on lenders' mortgage insurance (LMI) policies in 2016. 

Australian RMBS delinquencies and defaults will rise slightly from their current low levels in 2016, due to economic growth that will be below the long-term trend, an uptick in unemployment, and a slower pace for house price growth in some cities, it said.

Housing prices, particularly in Sydney and Melbourne, are expected to slow which will mean a slowdown in economic activity which will contribute to an increase in RMBS delinquencies and defaults in 2016, the note said.

Any weaker housing market also means borrowers at risk of default are less able to sell their houses quickly at prices sufficient to fulfil their repayment obligations.