Loan delinquency to rise, then fall in 2021

In its analysis of figures on residential mortgage-backed securities (RMBS) in Australia, Moody’s Investors Service said that delinquency rates for Australian RMBS will increase over the first half of 2021, attributing this to “uneven economic recovery” and the end of government and lender support measures.

However, the ratings agency said delinquency rates would improve towards the end of the year as the economy recovers.

According to Moody’s, which based its analysis on data from RMBS – Australia: Performance Update, the 30+ days delinquency rates for prime, and non-conforming and near-prime Australian RMBS declined in December 2020.

The ratings agency said this decline was driven by the availability of COVID-19-related government support measures for individuals and small-to-medium enterprises (SME), as well as loan repayment deferral schemes supporting borrowers over the second half of 2020.

Delinquency for prime RMBS declined to 1.24 per cent in December 2020, compared with 1.43 per cent in June 2020 and 1.52 in December 2019, while non-conforming and near-prime RMBS delinquencies declined from 3.95 per cent in June 2020 to 3.49 per cent in December 2020. However, the December 2020 delinquency rates rose compared with December 2019, when rates were at 3.34 per cent.

According to Moody’s, as of December 2020, the share of mortgages on COVID-19-related payment deferrals averaged around 3 per cent for prime RMBS portfolios, and 4.5 per cent for non-conforming and near-prime RMBS.

Commenting on their analysis, Moody’s said: “The Australian economy and housing market are recovering from the coronavirus-induced downturn, and we forecast GDP growth of 3.8 per cent in 2021.

“However, the economic recovery is still uneven, with conditions improving in some sectors and remaining challenging in others. Furthermore, most lender loan payment deferral periods and some government support measures, including the JobKeeper scheme and the coronavirus supplement for income support recipients, end in March.

“In this environment, mortgage delinquencies will increase over the first half of 2021, particularly when borrowers have to resume repayments after loan deferral periods end.”

Moody’s noted that rising house prices would limit mortgage delinquencies risks to some extent because they would make it easier for borrowers facing financial hardship to sell their properties and repay loans.

“But the positive influence of rising house prices will not be enough to prevent delinquency rates from increasing in the first half of 2021,” Moody’s said.

It concluded: “Towards the end of 2021, as the economic recovery gathers momentum, we expect the situation to turn around and for delinquency rates to improve.”

Standard & Poor’s recently published RMBS Performance Watch: Australia report showed that the level of mortgage arrears had begun to rise, with the arrears index increasing to 1.37 per cent in December 2020, compared with 1.28 per cent in the same period a year earlier.

Loan deferral value plummets to $10 billion

Meanwhile, data from the Australian Banking Association (ABA) has revealed that almost 97 per cent of all deferred loans resumed repayments by the end of January.

Figures from the ABA show that the total value of loans deferred has dropped from a peak of $245 billion in July 2020 to just over $10 billion in February 2021.

The ABA’s analysis of the Australian Prudential Regulation Authority’s (APRA) data on the latest loan deferral figures from the major banks has shown that as of 28 February, total outstanding deferrals make up 3.5 per cent of all loans that were deferred.

The data also shows that more housing loans remain in deferrals compared with SME loans, with 5 per cent of housing loans (22,480 out of 448,864 loans) remaining in deferrals, compared with 1.2 per cent of SME loans (2,803 out of 234,270 SME loans).

The ABA added that on the books of the four major banks, 0.2 per cent of SME loans, 0.5 per cent of housing loans, and 0.2 per cent of all loan facilities remain deferred.

The ABA said the data has come almost a year after the commencement of the support measure that allowed borrowers to defer loan repayments during the COVID-19 crisis.

Commenting on the figures, ABA CEO Anna Bligh said the key priorities for banks in 2021 would turn to supporting customers still experiencing financial difficulty, assisting with economic recovery, and “ensuring that credit flows into the recovering economy”.

“Over the past year, banks have cushioned the blow for their customers. Through 2021, their priority is helping customers rebuild and get ahead,” she said.

According to recent data from APRA, the value of new loans funded by the banks in the final three months of the year 2020 was up 20 per cent on the prior comparative year, and totalled $127.3 billion.

Of this, $88.8 billion was for owner-occupied loans, up more than $17 billion on the same period in 2019.

According to APRA data, as at 31 January 2021, 1.4 per cent of total loans were on temporary repayment deferrals totalling $37 billion.

[Related: Bank profits fell by over a third in 2020]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.