Con­ser­va­tive Lend­ing Stan­dards, Sta­ble In­ter­est Rates Cru­cial to Mort­gage Per­for­mance - In­dia Rat­ings

Accommodation Times - - Housing Finance -

Con­ser­va­tive un­der­writ­ing stan­dards are cru­cial to the per­for­mance of mort­gage loans, says In­dia Rat­ings & Re­search (Ind-Ra). More­over, a hike in in­ter­est rates be­yond a cer­tain thresh­old leads to ac­cel­er­ated fresh delin­quen­cies in loans that are oth­er­wise per­form­ing.

A study of loan per­for­mance in the three-year pe­riod of ris­ing in­ter­est rates from 2010 to 2013 sug­gests the loans that faced over 2% hike in rates were 50% more delin­quent than av­er­age dur­ing the same pe­riod. The study in­cluded only those loans that were mak­ing timely re­pay- ments at the be­gin­ning of the rate hike cy­cle.

While study­ing the im­pact of un­der­writ­ing stan­dards, both in­stal­ment-to-in­come ra­tio (IIR) and loan-to-value (LTV) ra­tio were found to be im­por­tant pre­dic­tors of mort­gage delin­quency. “Loans to res­i­den­tial mort­gage bor­row­ers whose re­pay­ments were above 50% of their in­come were found to be riskier, with delin­quency rates al­most 35% higher than av­er­age” says Pu­rav Shah, As­so­ciate Direc­tor, Struc­tured Fi­nance at Ind-Ra.

Like­wise, bor­row­ers who con­trib­ute over 40% to­wards the pur­chase of a dwelling unit (LTV be­low 60%) have shown greater will­ing­ness to pay, with nearly 25% lower delin­quency rates than the av­er­age. While high delin­quen­cies were ob­served at high LTVs, un­der­writ­ing prac­tices have been made strin­gent for loans with LTV over 80% by lim­it­ing IIRs to 50% for such loans.

A study of bor­rower char­ac­ter­is­tics sug­gests that loans to self- em­ployed bor­row­ers are 50% more sus­cep­ti­ble to de­fault than those ex­tended to salaried cus­tomers be­cause of higher in­come volatil­ity, which is ac­cen­tu­ated dur­ing economic down­turns.

The higher credit risk of selfem­ployed bor­row­ers was ob­served to be priced in by lenders with the av­er­age rate of in­ter­est charged be­ing 50bp higher than that of­fered to salaried cus­tomers for a sim­i­lar vin­tage of mort­gage orig­i­na­tion.

The re­port find­ings are based on a loan-level anal­y­sis of the agency’s rated res­i­den­tial mort­gage-backed se­cu­ri­ties port­fo­lio over 2008-2013, rep­re­sent­ing a full economic and in­ter­est rate cy­cle.

Al­though the broad trends are still likely to re­main valid, the delin­quency fac­tors may sig­nif­i­cantly vary for loans and lenders from those stud­ied in Ind-Ra’s rated uni­verse.

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