S&P says mortgage arrears stable thanks to positive job growth and low interest rates

Arrears on loans underlying Australian residential mortgage-backed securities (RMBS) transactions declined nationwide during the third quarter, in line with cyclical expectations, according to a recent report by S&P Global Ratings.

Continued employment growth and low interest rates have kept arrears low in most parts of the country, but there are marked differences in the arrears levels of resource and non-resource states as well as metropolitan and nonmetropolitan areas, according to the report RMBS Performance Watch: Australia.

RMBS Performance Watch: Australia looks at mortgage arrears across the country, based on the Australian Bureau of Statistics Australian geographical standard classifications.

The 20 worst-performing regions in the country are predominantly in the metropolitan and nonmetropolitan areas of Western Australia and nonmetropolitan Queensland, reflecting the greater impact of the downturn in mining investment in these locations.

The areas with lower arrears are mostly in inner and outer Sydney.

This reflects the correlation between property prices and arrears performance for more seasoned loans, which benefit from the improved equity build up and enhanced refinancing prospects this affords.

Amortizing loans with high levels of seasoning in metropolitan areas are underpinning the solid arrears performance of loans underlying Australian RMBS transactions.

The performance of these loans and ones originated more recently could diverge if interest rates start to rise, however, testing the prudence of lending standards.

We expect arrears performance to remain relatively stable while employment conditions remain stable and unemployment is relatively low.

However, the currently high level of household debt has increased borrowers' sensitivity to future interest rate rises.

We believe this risk is more heightened for higher loan-to-value ratio loans.

This is because there is less equity built up in the underlying property and such borrowers' refinancing prospects are likely to be less favorable, particularly in an environment of tightening lending conditions.

Standard & Poor's Performance Index (SPIN) measures the weighted-average arrears more than 30 days past due on residential mortgage loans in publicly and privately rated Australian RMBS transactions.

The value of loans underlying Australian RMBS transactions, including noncapital market issuance, was A$128.951 billion.

Click here to download the full report.