Mortgage delinquencies rise marginally in first quarter, but rate cut forestalled higher increase: Fitch

The proportion of mortgage holders a month or more behind in their mortgage repayments rose only marginally in the first quarter of the year, according to ratings agency Fitch, which says falling interest rates prevented a greater rise.

In its latest Dinkum Index for the first quarter of 2012 Fitch records that mortgage delinquencies rose from 1.57% in the December 2011 quarter to 1.6% in the first quarter of 2012 – equating to about $35 million loans turning bad.

The rise was mainly due to the number of loans more than 90 days in arrears, which increased by six basis points.

Fitch usually anticipates a higher rise in mortgage delinquencies in the first quarter of the calendar year due to “a portion of Australian borrowers temporarily affected by Christmas spending”.

“The two cash rates cuts in the fourth quarter of 2011 have indeed outweighed the seasonal Christmas spending in combination with minor increases in bank standard variable rates, as shown by the stable 30-59-day arrears,” says James Zanesi, director of Fitch's structured finance team.

"The decision by the Reserve Bank of Australia to cut cash rates by 25 basis points both in November and December 2011 to 4.25% has given some temporary relief to borrowers, as 30-59-day arrears have been stable overall and have not increased as much as others," he says.

Fitch expects the interest rate cuts on May 2 and June 6 to “impact positively on Australian mortgage performance”, with lower interest rates expected to result in improved affordability for existing borrowers and thus to lower arrears levels.

“Although delinquency rates are increasing and are above the historical Australian average, they remain low relative to other countries and well within the expectations used to derive Fitch's ratings for Australian RMBS transactions,” says Fitch.

It says the only major threat to Australian mortgage performance is declining house prices.

“A drop in housing prices could negatively affect transactions, in terms of recovery rates and time. As house prices drop, eventual sales prices are more likely to be below the mortgage balance, leading to losses and LMI (lenders mortgage insurance) claims. This depends on when the loan was written. Less seasoned mortgages tend to have amortised less and therefore tend to be more sensitive to house price changes,” says the ratings agency.

Zanesi says an increase in the proportion of loans 90 days or more in arrears is usually associated with a stagnating housing market, but in the third quarter Fitch monitored an increase in hardship cases and this may have contributed to the increase.

There was a notable rise in delinquencies among self-employed households.

Fitch's Dinkum Low-Doc Index recorded a growth in 30+ day arrears to 7.08% in the first quarter of 2012 from 6.62% in the December 2011 quarter.

Delinquencies in the low-doc segment tend to be two to 2.5 times those of full-doc loans, but in the 12 months to the end of March 2012 they were four to 4.5 times higher.