The Australian residential mortgage-backed securities sector is facing more risk than was the case 12 months ago, according to S&P Global Ratings annual review of the housing and RMBS market. The S&P report makes the point that while falling property prices might make for good headlines, the Australian RMBS sector has proved relatively resilient under pressure, with mortgage arrears remaining low and ratings performance stable."Alongside high household debt and low wage growth are emerging risks such as lower seasoning levels in new transactions and increasing competition," said S&P Global Ratings credit analyst Erin Kitson. "In addition, digital disruption is set to change the competitive landscape, with comprehensive credit reporting and Open Banking on Australia's doorstep.""A heightened regulatory focus on sound lending practices in recent years has resulted in a general tightening in lending conditions in the banking sector. "We expect to see continued regulatory focus on debt serviceability standards, particularly expense calculations, and third-party origination practices in 2019," the S&P report stated.Despite these risks, most RMBS portfolios have strong collateral quality, as evidenced by the modest loan-to-value ratios, low arrears, and high seasoning levels in most transactions. Nevertheless, there is no room for complacency, S&P said.Some key takeaways from the report were:•    in a period of falling house prices, as access to credit has tightened, the Australian RMBS sector has so far been relatively resilient to pressure, with mortgage arrears remaining low and ratings performance stable;•    the build-up in credit enhancement levels and overall strong collateral quality of most portfolios will underpin stable performance in the next 12 months;•    the non-bank sector has continued to capitalise on the retreat of banks from certain loan products, including investor and interest-only loans, and new issuance volumes in recent years from non-banks are nearly double their 2013 levels; and•    digital disruption is set to change the competitive landscape.Making the point that stable employment conditions are fundamental to ratings stability, S&P has forecast real GDP growth to remain stable and the unemployment rate to fall. "This is credit positive. Offsetting these forces are falling property prices, slower credit growth, and sluggish wage growth," the report stated.Australia's household indebtedness has continued to rise, though the rate of increase has moderated. High household debt levels increase borrowers' sensitivity to rising interest rates and any downturn in economic conditions. In the context of RMBS, a prolonged period of low interest rates has enabled many borrowers to pay down their mortgages and build up equity in their homes. Many of these borrowers have also benefited from more than five years of property price appreciation. Loans originated in more recent years, at the peak of the property boom, will be more exposed to property price declines, particularly those with higher loan-to-value ratios.Mitigating this is the observation that the use of lender's mortgage insurance in the Australian RMBS sector continues to decline. "Underwriting standards are now increasingly being influenced by regulatory guidelines, though there is still a close alignment between LMI guidelines and lending policies," said S&P.