Mortgage arrears on the rise: S&P

Missed home loan repayments increased in March, with growing unemployment set to send the numbers higher still, says S&P.

S&P said mortgages relief measures implemented by the major banks would be a temporary solution for many households.

The number of Australians behind on their home loan repayments increased in March, as signs of financial stress from the downturn bubble to the surface, but grim unemployment forecasts means that figure is likely to keep rising, says S&P Global Ratings.

Recently published data by S&P, which uses Standard & Poor’s Performance Index (SPIN), illustrated that as large swathes of the economy were frozen across March, nonconforming home-loan arrears increased to 4.38 per cent. Most of the increase was from loans between 31 to 60 days in arrears.

Non-conforming loans are offered to borrowers who don’t meet the standard lending criteria of their financial institution, and generally have higher exposure to self-employed and credit-impaired borrowers.

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Prime arrears — on home loans offered by lenders to the most financially secure customers — plateaued at 1.41 per cent.

The pandemic’s freeze on economic activity brought Australian society to a standstill, and despite the Morrison government’s $130bn wage subsidy program, recent analysis from the Reserve Bank of Australia estimates that unemployment will peak at 10 per cent in the second-half of 2020, with GDP growth plummeting 8 per cent.

In a bid to support financially vulnerable customers, each of the major banks have offered hundreds of thousands of deferrals on home loan repayments.

However, while S&P said mortgages relief measures implemented by the major banks would temper reported increases over the next six months, this would be a temporary solution for many households. S&P said forecasts of large increases in unemployment would likely result in arrears rising across the next 12 months.

“Mortgage arrears are a lagging indicator of financial stress; mortgage arrears did not peak in the RMBS sector until around 12-18 months after the onset of the 2008 global financial crisis,” S&P said.

“Anecdotal evidence from lenders shows that around 3 per cent to 7 per cent of prime loans in securitised trusts are under some form of COVID-19 arrangement. We expect these levels to be higher for nonconforming transactions.”

While the nonconforming — or subprime loans — SPIN peaked at 17.09 per cent after the GFC, the ratings agency said it didn’t expect it to reach that level in the aftermath of COVID-19. In its rationale, S&P highlighted that the nonconforming sector had an improved collateral quality and lower exposure to toxic assets.

The news follows Commonwealth Bank of Australia’s third-quarter trading update, which highlighted that consumer arrears were also seasonally higher across its personal loans, home loans and credit cards.

While these figures were down on the same period last year, the figure — factoring in arrears greater than 90 days — is unlikely to have captured the full extent of CBA customers under financial duress, as the period began before the onset of the crisis in Australia.