House price 'tail risks' worry Moody's

A change in the view of the "tail risks" if there were to be a steep fall in house prices and a sharp rise in home loan defaults in Australia is likely to lead to lower credit ratings for mortgage insurance companies from Moody's Investors Service. More than a dozen ratings of mortgage-backed securities are also under review by the ratings agency.

However, Moody's said that it doesn't expect the review to affect the ratings of banks and building societies.

Yesterday, the ratings agency announced a review of the lenders' mortgage insurance sector in Australia. It said its modelling "indicates that potential losses in [the] case of an unexpected severe housing downturn would challenge these companies' capital levels."

Moody's placed the Aa3 insurance financial strength rating of QBE Lenders' Mortgage Insurance, as well as the Aa3 rating of Westpac Lenders' Mortgage Insurance, on review for a possible downgrade.

The firm already had the A1 insurance financial strength rating of Genworth Financial Mortgage Insurance on review, following the additional reserving (and short term losses) announced by that company last month.

Moody's lead analyst for the Australian mortgage insurance sector, Ilya Serov, said that the "stress in the market and high levels of household debt is not a new point to make but it does pose a risk.

"The central projection is still a relatively stable one. For the tail risk… it takes no great imagination to identify them [the causes of losses]."

Serov said that "a nationwide view seems to us to mask some developments. Sydney and New South Wales had a boom from 2001 to 2003 but, on a relative basis, it's a stable market since 2003. On the other hand, the other states have all had price increases since then."

Moody's wrote, in an overview of yesterday's ratings action, that while banks have low average loan-to-value ratios and few low-doc and sub-prime loans.

"The modelling does, however, highlight the potential for elevated losses in some regions, which will inform ratings assigned to local financial institutions, depending on their individual mortgage portfolio composition."