RMBS prime arrears continue to rise: S&P

S&P Global Ratings’ (S&P) RMBS Performance Watch: Australia quarterly report (ended 31 December 2023) found that RMBS prime mortgage arrears have risen this quarter to 0.97 per cent.

Arrears have increased from a historical low of 0.58 per cent recorded during the pandemic, with S&P noting there was a delayed rise in arrears due to pandemic savings buffers, protecting mortgagors from the recent “monetary policy tightening cycle”.

The credit ratings reporter expects RMBS prime arrears to increase further as unemployment rises, however, it also stated that further rises are unlikely to be substantial.

RMBS prime mortgage arrears have now reached the long-term average of 1 per cent.

S&P expects that further increases to the arrears figures will be “tempered by modest falls in rates”, with the cash rate expected to be 4.1 per cent by the year’s end and coinciding with rising property prices.

S&P’s report stated: “We expect the cash rate to decline to 4.1 per cent by year end. This gradual decline will alleviate debt serviceability pressures, but this will be offset by rising unemployment.”

Nonconforming mortgage arrears were reported at 4.02 per cent at the end of Q4, an increase from 3.86 per cent in Q3.

S&P is also expecting that nonconforming arrears will rise faster than prime arrears, considering the weaker credit profile and decreased refinancing prospects that are common in this sector.

The report stated that “property price growth will help to stabilise arrears” in the nonconforming RMBS sector and “minimise losses”.

Prepayment rates for prime RMBS mortgages declined during Q4, however, S&P attributed this, in part, to seasonal trends that are common for the quarter. The report said that it expects prepayments to reduce in the coming months as borrowers struggle to make additional repayments.

Investor arrears came in at 0.73 per cent, compared with 1.1 per cent for owner-occupiers.

Looking at the spread of arrears across the states, Western Australia had the highest average arrears rate at 1.19 per cent despite a decrease from Q3 of 1.23 per cent. The Northern Territory, followed close behind at 1.09 per cent, which also had a decrease from 1.49 per cent from the previous quarter.

NSW and Victoria have had more significant increases in arrears since the cash rate began to rise, according to the credit ratings reporter.

S&P stated: “Higher property prices in Melbourne and Sydney elevate debt-to-income levels for borrowers, making them more exposed to rate rises.

“The arrears performance of self-employed borrowers (highly represented in [the nonconforming mortgages] sector) will be influenced by how exposed their cash flows are to a slowing economy and weaker consumer demand.”

Speaking on the impact of growing house prices on arrears rates, the report continued: “Property price appreciation affords borrowers experiencing financial stress greater agency in their exit strategy, tempering arrears.”

[Related: Arrears plateaued in 3Q23: S&P]