TEXT-Fitch Expects Rate Cuts to Boost Australian Mortgage Performance

(The following was released by the rating agency)

Link to Fitch Ratings' Report: The Dinkum Index – Q212

SYDNEY, October 03 (Fitch) Fitch Ratings says it expects Australian mortgage performance to improve in Q312 and Q412, following a series of interest rate cuts, the most recent being a 25bp cut on 2 October 2012. This was preceded by two rate reductions on 6 June and 2 May this year. In a sign of that mortgage performance is benefiting from the rate cuts from end-2011, delinquencies in the Australian prime RMBS sector already decreased to 1.54% in Q212, from 1.6% in Q112.

In its latest quarterly Dinkum report, Fitch says the improvement in arrears was most evident in the 30-59 days and 60-89 days bucket (down 7bp) as a small number of borrowers who increased their spending during the Christmas period, and then fell into arrears in Q112, have cured their delinquency status and recovered from the seasonal spending shock.

"The decision by the Reserve Bank of Australia to cut cash rates since last November has provided some relief to households and will continue to do so," said James Zanesi, Director in Fitch's Structured Finance team.

In Q112, arrears rose only marginally and by less than the increase normally caused by seasonal Christmas spending. In Q212, 30-59 days and 60-89 days delinquencies decreased by 7bp, indicating a modest improvement in borrowers' serviceability. Fitch expects this positive trend to continue in Q312 and Q412. The standard variable rate has fallen 95bp between November 2011 and September 2012 and is expected to fall further following the October 2 official interest rate cut.

Arrears in the 90+ days bucket continue to be higher than historical levels. The current level of 90+ days arrears may be explained by a stagnating housing market resulting in longer time periods to sell properties and by an increase in hardship cases. Hardship and payment moratoriums can prolong 90+ days arrears as lenders allow borrowers longer periods to rectify their arrears and to refrain from selling houses to repay loans.

More susceptible borrowers, such as self-employed households, continue to face challenges in meeting their mortgage obligations; Fitch's Dinkum Low-Doc Index recorded an increase in 30+ days arrears to 7.19% in Q212 from 7.08% in Q112. Delinquencies in the low-doc segment have historically been 2x-2.5x those of full-doc loans, but in the 12 months to end-June 2012 they were 4.5x higher. Australian delinquency rates remain low relative to other countries and well within the expectations used to derive Fitch's ratings for Australian RMBS transactions. This reflects the robust Australian economy and the continuing low unemployment rate which currently stands at 5.2%.

Covering four categories of delinquencies (30 to 59 days, 60 to 89 days, 90+ days and 30+ days) for full-documentation loans and low-documentation loans (both conforming and non-conforming), as well as claims against lenders' mortgage insurance, the Dinkum report enables market participants to compare the performance of Australian mortgages and monitor trends in the market.

The full report, entitled 'The Dinkum Index - Q212', is available at or by clicking the link above.