4Q16 www.fitchratings.com 28 April 2017 Australia Mortgage Market Index – The Dinkum RMBS Index 4Q16 At a Glance 4Q16 ∆ 3Q16 4Q15 Dinkum RMBS Index (%) 30+ days (%) 1.09 1.06 0.94 Fitch-Rated RMBS Index (%) 30+ days (%) 1.00 0.94 0.85 Non-Conforming RMBS Index (%) 30+ days (%) 7.72 5.27 5.69 Dinkum (publicly rated and issued) Fitch-rated (public, private and retained) 4Q16 - The Dinkum RMBS Index Data (Excel) Contacts Hai Duong Le +61 2 8256 0358 [email protected]m Natasha Vojvodic +61 2 8256 0350 [email protected]Stable Performance in Benign Economic Environment 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Dec 02 Mar 04 Jun 05 Sep 06 Dec 07 Mar 09 Jun 10 Sep 11 Dec 12 Mar 14 Jun 15 Sep 16 Dec 17 (%) 30-59 days 60-89 days >90 days >30 days (Fitch-rated) Source: Fitch (f) Dinkum versus Fitch-Rated Stability Despite Rate Cuts: 30+ days arrears increased marginally by 3bp qoq to 1.09% at end-4Q16, indicating that 2016 cuts in the target cash rate had little impact on borrowers’ serviceability. Higher Arrears YoY: Arrears in 2H16 were 15bp higher yoy, despite an improved economic environment, appreciating house prices and low interest rates. Real wage growth is low, but positive. Fitch Ratings is monitoring underemployment, which is high despite falling unemployment. A slowdown in the mining sector and surrounding regional areas may also have affected borrowers. Strong RMBS Performance: Fitch-rated residential mortgage-backed securities transactions have experienced extremely low levels of realised losses since closing and an increasing lenders’ mortgage insurance (LMI) payment ratio since 4Q12. Excess spread was sufficient to cover principal shortfalls during 4Q16. Threatening Regional House-Price Trends: Regional areas in Queensland, Western Australia and the Northern Territory have been affected by the mining slowdown and this has been reflected in defaults and losses. However, RMBS exposure to these areas remains limited, with most loans located in capital cities and major urban areas. 0.30 0.40 0.50 0.60 0.70 0.80 -25 -15 -5 5 15 25 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 (%) (%) Change in Home Prices versus 90+ Days Arrears Annual change (LHS) 90+ days arrears (RHS) Source: CoreLogic RP Data/Fitch
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4Q16
www.fitchratings.com 28 April 2017
Australia
Mortgage Market Index – The Dinkum RMBS Index 4Q16
At a Glance 4Q16 ∆ 3Q16 4Q15
Dinkum RMBS Index (%)
30+ days (%) 1.09 1.06 0.94
Fitch-Rated RMBS Index (%)
30+ days (%) 1.00 0.94 0.85
Non-Conforming RMBS Index (%)
30+ days (%) 7.72 5.27 5.69
Dinkum (publicly rated and issued) Fitch-rated (public, private and retained) 4Q16 - The Dinkum RMBS Index Data (Excel)
Mortgage Market Index – The Dinkum RMBS Index – 4Q16 2
Prime RMBS Delinquencies: Stable and Low
Dinkum RMBS Index
4Q16 ∆ 3Q16
Number of transactions
Collateral (AUDbn)
115 40.4
117
40.6
30-59 days (%) 60-89 days (%) 90+ days (%)
0.38 0.18 0.53
0.36 0.21 0.49
30+ days (%) 1.09 1.06
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14 Dec 16
(%)
Prime RMBS Arrears – Dinkum
30-59 days 60-89 days >90 days
Source: Fitch
Fitch monitors arrears because a loan’s delinquency status is a key
determinant of foreclosure. Fitch believes borrowers in arrears are more likely
to default and conservatively models all loans that are over 90 days in arrears
as being in default.
Fitch Dinkum RMBS Index (Publicly Issued)
The Fitch Dinkum RMBS Index worsened marginally by 3bp qoq to 1.09% at
end-4Q16. Arrears over 30 days for 4Q16 were still low and have been below
1.20% since September 2013. In contrast, 90+ days arrears of 0.53% are at
the highest level since September 2013, although in line with the five-year
average of 0.54%.
Fitch believes the majority of delinquencies in the current benign environment
may be due to non-economic factors, such as divorce, illness or extraordinary
expenses, and expects 30+ days arrears to remain above 0.80%. Borrowers
who cannot service their loans are unlikely to benefit from further
improvements in key drivers. Factors that could result in a deterioration of the
index include slowing property-price growth, increasing underemployment or
unemployment, rising interest rates and payment shocks.
The Fitch-Rated RMBS Index (Public, Private and Retained)
The Fitch-rated RMBS Index, which includes large issuer-retained
transactions, has shown a similar trend, with arrears worsening by 6bp qoq to
1.00% at end-4Q16. Fitch expects this index to continue outperforming the
Dinkum RMBS Index. Arrears have been increasing over the previous few
years, in line with the big-four Australian lenders’ origination.
The Dinkum RMBS Index is a smaller sample of the mortgage market, but a
more stable measure of transaction performance, as it is not influenced by
frequent top-ups of new loans or mortgage loan removals, which are common
in issuer-retained transactions. The Fitch-rated RMBS Index represents
17.2% of the total Australian mortgage market.
30+ days RMBS Delinquency Rate
4Q16 ∆ 3Q16
Dinkum (%) 1.09 1.06
Fitch-rated (%) 1.00 0.94
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14 Dec 16
(%)
Dinkum versus Fitch-Rated
>30 days (Dinkum) >30 days (Fitch-rated)
Source: Fitch
Fitch has removed low-documentation prime mortgage performance results as the sample size has reduced significantlyduring the past decade and is no longer a reliable indicator of performance. A negligible portion of prime low-doc mortgages have been written and securtised during this period.
4Q16
Mortgage Market Index – The Dinkum RMBS Index – 4Q16 3
Prime RMBS Repayment Rates: Stability in the 20%-25% Range Fitch monitors repayment rates as they can affect RMBS investors’ payout,
depending on mortgage performance and interest-rate levels. High repayment
rates are usually a positive indicator of household wealth, credit availability
and a strong housing market.
Australian borrowers tend to repay their mortgages ahead of schedule.
Borrowers remained far ahead of their scheduled payments at end-4Q16.
This provides borrowers with a servicing buffer so they can stay out of arrears
longer if experiencing an income-break or interest-rate rise.
Repayment rates are also strong due to the ability to refinance. This is
supported by the competitive lending environment, characterised by low
interest-rates, which facilitates borrowers’ refinancing and potentially more
borrowing. Competition for new owner-occupier borrowers is particularly
strong due to the Australian Prudential Regulation Authority’s (APRA)
directive to restrict annual investment-loan growth to 10%.
The Prime RMBS Repayment Index
The Dinkum RMBS Index borrower payment rate (BPR) slightly decreased to
23.4% at end-4Q16, from 24.0% in the previous quarter. The conditional
prepayment rate (CPR) also slightly decreased qoq to 21.4% at end-4Q16,
from 22.1%.
Repayment levels have been stable over the previous four years; fluctuating
only due to seasonality. Fitch expects this stability to continue in the near
term. Repayment rates have historically risen in the middle of the year due to
low seasonal spending, while the end of the year is characterised by a slight
slowdown as borrowers grapple with Christmas and holiday spending.
RMBS Repayment Rates (%)
Prime
4Q16 ∆ 3Q16
Dinkum
CPR (%) BPR (%)
21.4 23.4
22.1 24.0
15
20
25
30
35
Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14 Dec 16
Mortgage Market Index – The Dinkum RMBS Index – 4Q16 6
Non-Conforming RMBS Delinquencies: Volatility due to Seasonality and Index Size Non-conforming mortgage lending standards do not meet the standard lending
criteria of LMI providers or mainstream lenders and usually involve lending to
borrowers with poor credit or payment histories.
Fitch Non-Conforming RMBS Index
Fitch’s Non-Conforming RMBS Index worsened by 2.45% to 7.72% at end-
4Q16 due to volatility caused by seasonality and the index’s small size. The
index remains well below 1Q09 record highs, when arrears climbed to
20.90%, or 3x current levels.
Consumer protection laws require lenders to check if borrowers can service
loans. Lenders must perform income verification for all borrowers, including
those taking out low-doc loans. This is positive for investors in non-conforming
Australian RMBS, which include low-doc loans.
Arrears between 30-59 days increased the most among the arrears buckets,
by 1.15% to 2.98% in 4Q16. Fitch expected 30-59 days arrears to remain in
the low range of 1.50%-2.50%, in line with levels seen in the previous two
years. An increase above these levels may indicate some financial struggles
among non-conforming borrowers. Fitch expects stable fundamentals in the
near-term due to low unemployment and a strong housing market, which
allows borrowers to sell their properties if they experience financial difficulties.
Highly leveraged borrowers in specific geographical areas, such as Northern
Queensland, may have been affected by the local property market.
Assets comprising the index totalled only AUD1.0 billion at end-4Q16,
subjecting the index to volatility from issuance and amortisation. The non-
conforming market has seen steady issuance over the previous year, but the
index remains a small subset of the mortgage market.
Further breakdown of non-conforming data can be found in Appendix 3: Non-
Conforming Additional Arrears and Losses Data.
Non-Conforming RMBS Index
4Q16 ∆ 3Q16
No. transactions
Collateral (AUDbn)
9 1.0
-
8 1.0
30-59 days (%) 60-89 days (%) 90+ days (%)
2.98 0.97 3.77
1.83 0.73 2.72
30+ days (%) 7.72 5.27
0
5
10
15
20
25
Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16
(%)
Non-Conforming RMBS Arrears
30-59 days 60-89 days 90+ days
Source: Fitch
Non-Conformaing RMBS Repayment Rates
4Q16 ∆ 3Q16
CPR (%) BPR (%)
26.5 27.0
25.9 26.4
0
10
20
30
40
50
Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16
Mortgage Market Index – The Dinkum RMBS Index – 4Q16 16
Appendix 3: Non-Conforming Additional Arrears and Losses
0.0
0.5
1.0
1.5
2.0
2.5
Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16
(%)
Non-Conforming RMBS Losses – Annualised Loss Rate
Source: Fitch
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 6 12 18 24 30 36 42 48 54 60 66 72 78
(% of original balance)
(Months since closing)Source: Fitch
Non-Conforming RMBS Losses – Actual Loss Rate Since Closing
4Q16
Mortgage Market Index – The Dinkum RMBS Index – 4Q16 17
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