This despite current cycle of interest rate hikes
Residential mortgage-backed securities (RMBS) arrears performance remained resilient despite the current cycle of interest rate hikes, still tracking below pre-pandemic levels, recent data from Perpetual Corporate Trust has revealed.
The findings, part of Perpetual Corporate Trust report, Emerging Opportunities: An in-depth assessment of Whole Loan Sales in Australia, showed that while bank and non-bank 90+ Days Past Due (DPD) arrears increased by 0.17 basis points to 0.57% of current balances as of Aug. 31, they remained well below the 0.69% average observed between 2016 and 2021.
Perpetual Intelligence’s Data Warehouse, representing $420-plus billion in authorised RMBS, accounts for more than 20% of the Australian mortgage market.
Perpetual Corporate Trust CEO Richard McCarthy (pictured above) noted that the recent surge in the Reserve Bank’s cash rate, which has seen interest rates increase 13 times since May 2022, had raised concerns about borrowers’ ability to cope with higher mortgage repayments and the impending mortgage cliff as fixed-rate mortgages expire.
“Despite the negative sentiment, analysis of the RMBS market from our data warehouse shows that arrears performance across the RMBS sector has been better than perhaps many had expected,” McCarthy said.
“The recent rise in 90+ DPD arrears needs to be taken in the context of coming from an extremely low base, where arrears had dropped more than 30% between December 2021 and December 2022, reflecting the ultra-low interest rate environment.”
A comparison between banks and non-banks revealed that non-bank 90+ DPD arrears have risen from 0.31% to 0.76%, while banks have seen an increase from 0.43% to 0.57%. For non-banks, the increase in arrears is more noticeable in non-prime loans, putting them back to pre-COVID levels but well below Global Financial Crisis (GFC) levels. Non-prime loans comprised less than 0.5% of the total mortgage market.
“Resilience in the non-bank sector was evident given that only 4% of non-bank loans are fixed rate, meaning that the majority of their customers had already adjusted to the RBA rates rises,” McCarthy said.
The report also highlighted key RMBS data points, including LVR. Currently, loans with an LVR above 80% make up only 18% of total loans, a significant reduction from the 29% observed in 2013. Median offset and redraw amounts, while not growing, remained more than 50% above pre-COVID levels.
The report is the result of qualitative and quantitative research involving discussions with 17 bank and non-bank participants, as well as global and domestic investors. It aimed to assess the potential market for whole loan sales in Australia, a funding structure less common in the Australian market compared to Europe and the US.
“However, given the relative strength and resilience of Australia’s housing market, which is supported by the RMBS data released as part of the report, the low incidence of whole loan sales in the Australian market suggests there is currently no overwhelming need for this type of funding,” McCarthy said.
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