Mortgage delinquencies on the rise as rate increases hit home owners

Mortgage delinquencies will increase during the next 12 months as rising interest rates continue to put pressure on new home owners, a new report from leading ratings agency Fitch has found.

The Fitch Ratings “Dinkum Index” for the last three months of 2009 found delinquencies in the 30-59 day bracket remained relatively low, but the number of low-doc delinquencies increased by over 50%.

Additionally, while arrears for prime conforming mortgages, which make up the majority of mortgages in Australia, declined over the quarter by 0.02% to 1.19%, Fitch associate director in structured finance Leanne Vallelonga said this result has actually been skewed.

Vallelonga said five new mortgage-backed security transactions had pushed this result higher than expected. If the figures are adjusted, the result is an increase in 30+ day arrears to 1.23%.

“I expect delinquencies are going to increase as interest rates continue to rise, and if unemployment rises as well,” Vallelonga says. “Residential mortgage borrowers benefited from the rate cuts, but as the rates turn delinquencies will increase. Not to levels that are necessarily astronomical, but levels of concern.”

Fitch also said low-doc 30+ day arrears worsened, with non-conforming arrears rising to 16.47% from 15.59%, while conforming arrears rose to 4.82%.

But Vallelonga said the rising delinquency rates were the fault of borrowers believing they could borrow more than they could afford.

“I don’t necessarily think it’s the fault of the banks. Certainly people over commit, and think that if they can afford the mortgage now they can afford it later on. Of course unemployment and higher interest rates are just things that happen, and you can’t necessarily forecast that.”

Despite the bad news, there were some improvements in the 90+ day arrears categories. Vallelonga said this is due to rising property prices, which enable lenders to sell properties quickly.

“Financiers have been able to liquidate assets very quickly, which indicates property prices have continued to increase during the last half of 2009.”

“If you look at what was happening in 2008 and early 2007, property prices were coming down and it was a lot harder to sell and potentially properties needed to stay on the books a lot longer, increasing 90+ day delinquency rates. The opposite is happening here.”

But Vallelonga said the outlook for the rest of the year indicates arrears will increase as interest rates rise. Although the Reserve Bank has held off on rate rises for the last three months, governor Glenn Stevens has continually flagged intentions to move the official cash rate away from expansionary territory.

“Obviously the low-doc borrowers are going to be hit quite significantly. They haven’t necessarily benefited from all of the rate cuts last year, and have refinanced themselves out of trouble. But that part of the market has shut down and I think they are going to be quite impacted by rate hikes.”