Moody's has interest only in Australian mortgage risk
It is the loan to valuation ratio rather than the use of a home loan to fund property investment that is the chief risk for Australian banks and other lenders to manage, Moody's Investors Service concluded in a new study of the mortgage sector."The results show a very strong positive correlation between the LVR and the probability of default for Australian prime mortgages," Moody's said in their report "Low Interest Rates Mask Key Mortgage Default Drivers," released this week.It said that "while the delinquency rate is almost negligible for loans with an LVR below 70 per cent, it spikes significantly beyond that point, reaching an average rate of 9.14 per cent for the 95 per cent to 100 per cent LVR bucket."This material bias toward high LVRs for delinquent loans confirms that LVR is a very significant indicator of the likelihood of default."Moreover, Moody's said "LVR has been a strong driver of default through all economic conditions."Of investment loans - a subset of the market of keen interest to APRA - Moody's shared the prudential regulator's concerns to some degree, though recent loss levels do not support this view."Investor loans started outperforming benchmark loans in 2012, and their performance continued to improve into 2014," Moody's said."This development coincided with the significant interest rate cuts that the Reserve Bank of Australia began implementing towards the end of 2011 and through 2014. "Historically investor loans have shown a higher default rate than benchmark loans, and it is only more recently, in the current prolonged period of record low interest rates, that they have started to outperform," Moody's cautioned.This outperformance is even more dramatic for interest-only investor loan loans.Moody's pointed out that "investor loans are more sensitive to interest rates" simply because, on average, investor loans are larger than owner-occupier loans, with the average investor loan being A$245,500, compared with an owner-occupier loan at A$207,700."Interest only loans are now common. Moody's said that of the loans covered in its rated mortgage-backed securities "universe", 51 per cent were interest only, up from 31 per cent at the end of 2008.In a separate and periodic report, Moody's said the performance of Australian prime residential mortgage-backed securities improved over the three months to June 2015, with arrears of 30 days or more falling to 1.36 per cent at June 2015 - down from 1.40 per cent at March 2015.