Mortgage delinquencies at record high and could climb further: Report

The number of people 30 days or more behind on their mortgage payments has reached a record high and could climb further if the RBA raises rates as anticipated in the coming months.

The Fitch Dinkum Index recorded that 30+ days delinquencies in the Australian prime RMBS sector reached a record high of 1.79% in the first quarter of 2011, up 42 basis points from the December 2010 quarter.

Fitch analysts believes delinquencies have peaked in the current cycle and expects them to “fall slightly in either quarter two, 2011 or quarter three, 2011 as the usual seasonal effect dissipates, borrowers affected by flooding are expected to receive financial support and for business conditions to stabilise”.

However, this forecast is based on interest rates remaining unchanged, an unlikely scenario given that banks like the CBA expect to pass on at least two RBA interest rate rises to customers this year.

James Zanesi, analyst at Fitch Ratings, told SmartCompany this forecast only holds so long as conditions remain the same. “We have not factored in any interest rate rises,” he says.

“If the RBA increases the cash rate by 25 bps and the banks pass on 50 bps, delinquencies will increase,” he says.

According to Zanesi, increasing household sensitivity to interest rate rises is reflected in the Analytical Living Cost Index (ALCI), which currently stands at 4.9% year on year, significantly higher than CPI, at 3.3%.

The ALCI reflects “out of pocket” living expenses including interest paid on mortgages, a cost not included in the CPI calculation.

Commenting on the report, Janusz Hooker, executive chairman of LJ Hooker, says it must be born in mind that it only covers mortgage backed securities, which account for less than 10 per cent of the market, represent borrowers with a slightly higher risk profile, and only based on those 30 days in arrears.

“We would look at 90 days in arrears and at the broader market before drawing any conclusions. It could be a leading indicator that there is more stress out there, but it’s too early to say for 90 per cent of borrowers,” he says.

“It will stress certain parts of the market – but it won’t worry two thirds of the market,” he adds. According to Hooker, the majority of borrowers can absorb 100 or even 200 basis point increases.

Any increase in rates would take at least two months to feed through to the Dinkum Index, given the time it takes lenders to apply mortgage payment increases and the fact that only loans that are more than one month in arrears are reflected in the index.

In a speech delivered today, deputy Governor of the RBA Ric Battellino, said while the household sector as a whole continued to show a “good deal of resilience in meeting loan repayments, the increase in indebtedness over the past 15 years does mean that households are now significantly more sensitive to changes in interest rates.”

Fitch analysts anticipated the record increase in the first quarter of the year due to the “usual seasonal negative impact that Christmas spending and holidays have on delinquencies in the first quarter of the year” as well as the November 2010 cash rate rise and recent natural disasters, but did not expect arrears to increase to the extent that they have.

Fitch says the impact of natural disaster such as the floods in Queensland and Victoria and cyclone Yasi was especially felt in the 30-59 days bucket.

“Borrowers affected by natural disasters may fall behind in their scheduled payments while requesting or receiving financial help. Self-employed borrowers whose business has been affected by the floods may also take longer to cure their delinquency status, depending on how bad their business has been affected and the degree of available financial help,” it says.

Those borrowers 30-59 days in arrears increased to 0.79% in the first quarter of 2011 from 0.54% in the fourth quarter of 2010, in turn contributed to the rise in overall 30+ days arrears.