S&P: Mortgage arrears are starting to decline

The percentage of delinquent housing loans contained in Australian prime residential mortgage-backed securities (RMBS) declined to just 1.10% in August, from 1.17% in July, according to ratings agency Standard & Poor’s (S&P).

Over that month, the New York-based ratings agency said arrears decreased in all states and territories, except the Australian Capital Territory (ACT). Noticeable improvements were also registered in Australia’s mining states and territories.

“The Northern Territory (NT) recorded the largest improvement, with arrears declining to 1.63% from 1.98% a month earlier,” S&P said. “In Western Australia, arrears fell to 2.22% in August from a historic high of 2.38% in July.”

These improvements may reflect more favourable economic conditions, following recent surges in commodity prices, along with an uptick in employment levels.

Improvements were also noted in Australia’s most populous states. “The more populous states of New South Wales, Victoria, and Queensland, where around 80% of loan exposures are domiciled, recorded an improvement in arrears in August,” S&P said.

Despite a small increase in arrears in the ACT (0.63%), they’ve generally declined across the country.

“Relatively stable employment conditions and low interest rates continue to underpin the low levels of arrears for most Australian RMBS transactions”, S&P said. “Lending standards generally have tightened in many areas since attracting greater regulatory scrutiny beginning in 2015.”

While the prospect of higher mortgage rates could lead to an increase in mortgage arrears, particularly among borrowers with high loan-to-value ratios, strong labour market conditions should keep any major surge in check.

“Provided employment conditions remain relatively stable … we do not anticipate arrears materially increasing above current levels in the next 12 months,” S&P said.

“Some loans underwritten before 2015 could be more susceptible to higher arrears, particularly interest-only loans with higher loan-to-value (LTV) ratios for which no equity has built up during the interest-only period,.”