Mortgage insurance company prepares for a spike in home loan defaults

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Though Genworth Mortgage Insurance chief executive Georgette Nicholas believes that the risks of a property bubble have abated, the company is still preparing itself for a surge in home loan defaults in areas hard hit by the mining boom—particularly the regional areas of Queensland and Western Australia.

Nicholas agreed that the intervention from the prudential regulator last year has taken the excess heat out of the property market.

"Overall economic conditions are supportive, with record low interest rates and unemployment stable, and the fundamentals of the residential mortgage market are sound," Nicholas said. "In particular, there has been a significant decline in the proportion of high loan-to-value ratio (LVR) loans originated, given regulatory changes and changes in lender risk appetite."

The falling LVRs may have hurt Genworth's business as customers now need fewer lenders' mortgage insurance, but Nicholas perceives this to be a positive thing for the creation of a more stable market, hence reducing the company's capital requirements.

While Sydney and Melbourne remain to be strong markets, both Queensland and Western Australia are under pressure due to the end of the mining boom. This leads to the emergence of a "dual economy," leading Genworth to provision an extra $22 million this quarter for the slight uptick in the number of mortgages going bad in mining towns. House prices in these areas have already dropped by 25 to 30 per cent and are expected to fall further.

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