Mortgage delinquencies rise unexpectedly but market still strong, ratings agency says

Mortgage delinquencies increased in the fourth quarter due to a combination of higher interest rates and increased holiday spending, a new Fitch report has revealed, and the situation will worsen next year with the natural disasters in Queensland expected to increase the number of arrears.

But Fitch structured finance associate director James Zanesi says that although the number of 90-day arrears has increased, the situation should stabilise in the next few months as the current interest rate environment provide a haven for financially stretched borrowers.

“We saw that in November the RBA increased interest rates. But overall, there is no reason to think they will do so again soon,” he says, also pointing out the number of arrears overall is still relatively low.

“The report also shows that arrears are also being recorded by those people who are already experiencing difficulties.”

The Fitch report shows 30+ day delinquencies increased to 1.37% in the fourth quarter of 2010, up from 1.3% in the third quarter – a move the company says was “unexpected”. 90+ day arrears have also increased from 0.48% in the third quarter to 0.54%, which Fitch says feeds into the 30+ day result.

Fitch points to stagnation in the housing market as one factor – prices have started stabilise after 18 months of solid growth. Western Australia and Queensland have been subject to some of the highest arrears rates, it points out.

But Zanesi also says mortgage insurance activity was strong during the same period, “which implies strong sales of repossessed properties”.

It appears the hardest hit were those holders of low-doc loans, specifically the self-employed. Zanesi says 30+ day arrears for this category increased to 4.06%, indicating more susceptible borrowers are being impacted the most.

“To simplify the report, I would say it’s a combination of income issues, and affordability. The low-doc mortgages are a good proxy to understand how people performing, and that suggests people such as the self-employed are having issues.”

“The issue is not so much about employment, but about income and the ability to meet payments.”

And Fitch expects that result to get even worse, “as numerous self-employed borrowers in Queensland are likely to have been affected by the flood”.

“Their performance will therefore be linked to how badly their businesses have been affected and the financial support they receive from government or private initiatives.”

While the report itself points out that it cannot be confirmed whether the November rate hike has had any effect on borrowers, it nevertheless says interest payments are hurting the self-employed.

“The ratio is at its highest since December 2006 (when the index was created) and indicates that the increase in interest payments over the past year and a half has particularly affected self-employed borrowers who have self-certified their income,” the report states.

However, the current station will improve. Zanesi says although housing price growth is mostly stable, prices will still increase over the next year, and a strong economy bolstered by high employment will keep the 90+ day arrears rate down.

He also points to a report conducted by Fitch last year which found the country’s major banks would be able to sustain a huge drop in prices and subsequent rises in arrears.

“The main driver behind this result is mortgage costs, we’ve seen rises in interest rates and the banks have increased variable rates as well.”

“But the next report will be for the first quarter, and while we may very well see an increase due to the holiday spending, and the floods in Brisbane… these are not indicators that there is an overall pressure on the market.”

The report says that if no adverse developments influence the Australian economy or housing market, “90+ day arrears should return to historical levels”.