photo credit: kretyenBy Jill Fraser for Lending Central

Despite continued economic volatility globally mortgage delinquencies have not worsened and overall Australian residential borrowers have kept up their mortgage repayments.

Credit ratings agency Fitch Ratings’ last report, released this week, reveals that delinquencies have continued their downward trend, decreasing between the first three months of this year and the second quarter.

Arrears improved slightly across all sectors except for non?conforming reduced?documentation loans in the 30-59 day bracket, which increased to 4.87% in the second quarter of this year from 4.45% in the first quarter.

General ongoing arrears stability suggests that peak arrears were reached in the last quarter of 2008 and arrears are not likely to reach those levels again for the remainder of 2009.

The unseasonal decrease in arrears from the fourth quarter in 2008 to the first quarter in 2009 suggests households battened down the hatches and were riding out the storm ahead of other economic indicators that have subsequently improved through the second quarter of 2009.

Fitch’s view was that the usual spike in arrears from Q408 to Q109, due to Christmas spending and repayment of credit card debt, did not occur because of a combination of lower interest rates and the first bout of government financial support.

Australia has faired better than most other countries during the global financial crisis; however, the influence of contracting global economies further impacting on Australia remains a real possibility.

The combined efforts of expansionary fiscal and monetary policy within Australia appear to have had a positive influence in sheltering Australians from the global storm.

The sixth cut in the official cash rate to 3% in April 2009 by the Reserve Bank of Australia (RBA) has been effective in keeping many borrowers’ cost of funds at historical lows. The RBA has indicated in its August 2009 Minutes of the Monetary Policy Board Meeting that it would, in due course, need to adopt a less expansionary policy stance - therefore, the next likely direction in interest rates is up.

The increase in arrears for non?conforming reduced?documentation loans raises concerns for this segment of the market, which is primarily made up of self?employed borrowers.

They are likely to be feeling the full effects of the economic downturn and related slowing and or failure of their business ventures.

Although the increase is relatively large, non?conforming reduced?documentation loans only represents a small segment of the securitised universe captured within the Dinkum Index (Fitch’s measure for full documentation loans), being less than 0.10%.

Looking ahead the report says that a number of competing factors will determine borrowers’ sentiment as 2009 progresses.

There is no expectation that there will be any further expansionary fiscal policy and/or monetary policy for the remainder of 2009; however, unemployment and further global instability will be the key factors for Australian borrowers and policy makers.

As reported by the Australian Bureau of Statistics (ABS) the unemployment rate increased to 5.7%, seasonally adjusted in June 2009, dropping back slightly from 5.8% in March 2009. Fitch’s sovereign analysts have forecast the Australian unemployment rate to rise to 5.8% during 2009, up to 7% in 2010.

Arrears are more likely to increase once interest rates and unemployment both start to increase, which is not expected over the next quarter; however, the risk is there through potentially the latter part of 2009 and into 2010.

The real tests for householders to continue paying their loans depends on interest rates and unemployment trends.
The RBA is not expected to lift rates at its next meeting in October but many economists have forecasted rate rises before the year’s end.