Australian Prime RMBS arrears rose in 4Q

Global rating agency Moody's Australian RMBS Performance Review shows the prime 30-plus arrears rate rose in the fourth quarter of 2012 to 1.44% in December, from 1.22% in September. Nevertheless, it was still lower than the same period in 2011, when it was 1.59%.

The increase was consistent across most issuer groups. The arrears rate for the major banks rose to 1.15% from 0.90%, while for the regional banks it rose to 1.67% from 1.54%, and for non-ADIs it rose to 3.24% from 2.55%.

However, other ADIs -that is those entities which are not either major or regional banks did see an improvement in performance, with their arrears rate falling to 1.49% from 1.56% over the quarter.

The prime 30-plus arrears rate averaged 1.48% over 2012, which is a level that we consider as low. In 2013, we expect this low rate to remain stable, underpinned by expected GDP growth of 2.5 to 3.5%, a continued low interest rate environment, and steady unemployment of 4.5 to 5.5%.

At the same time, the 30plus arrears rate for deals with 100% low doc loans has witnessed continued increases over recent years, reaching a record high of 5.90% in November, before ending the fourth quarter at 5.78%, up from 5.09% at the end of the third quarter.

Borrowers in these deals provide little or, in the case of no doc loans, no proof of income. The higher delinquency of these loans can be explained by the cash flow volatility of the borrowers, who are typically self-employed. After excluding 100% low doc deals, the prime 30-plus arrears rate would have been seven basis points lower at 1.37% in December.