Low impact from prior rate shocks
Interest rates may be rising - and on both variable rate and longer-term fixed-rate loans - but the incidence of home loans falling into arrears is getting a little better for most categories of home loan customers.
Fitch Ratings yesterday published its quarterly review of arrears and losses on home loans (a document styled the Dinkum Index).
The ratings agency reported a slight reduction in the level of arrears in the December 2007 quarter to 1.07 per cent, down from 1.15 per cent in the September 2007 quarter. The trend in the Fitch data is similar to that reported by Standard & Poor's (albeit only up to November) a day earlier.
On low documentation loans the level of arrears is much higher, at 4.12 per cent, and rising, as the sequence of nine interest rate rises affects this segment of lenders' portfolios more severely. However, most low doc loans are on lesser loan to valuation ratios than the average.
The Fitch data covers a slightly smaller pool of securitised home loans than that of S&P and the level of arrears was pulled down slightly by the inclusion of several new securitisations from mid 2007 with much lower levels of arrears.
The utility of arrears data on securitised loans in aggregate as a proxy for the whole market may also begin to wane as banks look for wholesale funding elsewhere until the liquidity crunch eases.
Fitch reported claims on lenders' mortgage insurers (by programs covered in its report) of $3.8 million during the December 2007 quarter, broadly consistent with recent trends. However, Fitch noted that "while the low historical claims rate is impressive this is not necessarily a good indicator of future performance. Strong property price appreciation in Australia over the last 10 years has taken much of the sting out of defaults."
More defaults may be on the horizon, given the rise in the Reserve Bank of Australia's target in the official cash rate, announced yesterday, that will take the cash rate to seven per cent and take the (misleading) standard variable home loan rate to close to nine per cent.
The "stress-o-meter", an index devised by Fujitsu Consulting, predicted that 750,000 Australian households would experience some form of mortgage stress by June this year if interest rates continue to rise. This is 58 per cent more than the firm suggested were facing mortgage stress in only November last year.
The firm, which adopts a rather alarmist tone in media releases to spruik its modelling, said 300,000 Australian households face losing their homes within six months if interest rates continue to rise. This is double Fujitsu's estimate of three months ago.
Fujitsu estimates the number of households in severe mortgage stress at 188,000, up 61 per cent. An additional 284,000 households are in mild mortgage stress, up by 65 per cent.