A recent report by S&P Global Ratings has given a favourable sheen to the Australian residential mortgage-backed transactions originated by the major banks. Of the RMBS securities rated by S&P, those originated by the four majors comprise more than 53 per cent of the loans currently underlying Australian prime RMBS transactions.  S&P's credit analysts Erin Kitson and Catherine Chooi identified the following characteristics of major bank-originated loans that underlie RMBS transactions:  the portfolio collateral quality in the major banks sector remains strong, as evidenced by loan-to-value ratios of around 58 per cent and seasoning levels of about 65 months; the major banks' combined exposure to loans with an LTV ratio greater than 80 per cent is around 14 per cent - this is lower than the other banks and nonbanks sectors, but higher than the nonbank financial institutions and regional banks, partly reflecting the lower seasoning of major bank portfolios compared with other originator types; high prepayment rates of around 22 per cent have contributed to a strong build up in credit support for major bank-sponsored transactions and the credit support available to AAA (sf) rated tranches is three to seven times higher (earlier vintages have higher coverage levels) than the post-lenders' mortgage insurance credit support requirements for the major banks RMBS sector; and exposure to low-documentation loans "is insignificant" at 1.55 per cent (these are legacy loans originated by Challenger Mortgage Management, which was acquired by National Bank of Australia in 2009. All other loans originated in this sector require full documentation). The level of loans in arrears by more than 30 days for major bank transactions is relatively low, at 1.08 per cent. This is despite the trend in the past two years for Australia's major banks to have recorded some of the largest increases in arrears, albeit off low levels, against a backdrop of increasing outstanding loan balances, said S&P.  "This trend partly reflects a change in the measurement and reporting of hardship accounts to align with regulatory provisions during the period." For all major bank RMBS transactions since 2016, with accounts that were being treated under banks' hardship rules, were nevertheless required to "migrate" through "delinquency buckets" until becoming delinquent for more than 90 days.  "This alignment in reporting standards accounts for some of the rise in major banks' loans that are more than 90 days in arrears during the past 18 months," S&P explained. Another point of concern was the prevalence of interest only loans among all originator types, as the major banks have the second highest exposure to interest-only loans - at 28 per cent - after nonbank originators, compared with around 25 per cent for the entire prime RMBS portfolio.  The interest-only exposure for residential term loans originated by authorised deposit-taking institutions was around 39 per cent as of 31 March 2017, according to APRA statistics. "The longer a loan is outstanding, the longer it is exposed to economic cycles and related stresses. By virtue of their repayment structure, loans with an interest-only period pay down more