Non-Conforming Loans Are Making A Comeback In Australia With $3 Billion Issued In 18 Months

Punk Rockers relax on the beach as punks gather in Blackpool for the annual Rebellion Punk Rock Festival in the UK. Christopher Furlong/Getty Images

Australia’s non-conforming residential mortgage backed securities (RMBS) market has re-emerged after stalling during the GFC, according to Moody’s Investors Service.

Over the last 18 months, 10 new transactions totalling $3 billion have been issued, including $200 million in USD denominated issuance from Australian originators.

“The underwriting standards and the overall quality of the borrowers in these portfolios are better than in comparable transactions before the financial crisis,” Moody’s said.

And they are better than pre-2008 non-prime transactions in the US and UK.

Outside of Australia, only the UK and US have non-prime RMBS markets but there has been no new non-prime issuance in the US and limited issuance in the UK post-2008.

Non-conforming loans in Australia are granted to borrowers with negative credit histories or those who provide limited verification of their financial situation, and therefore do not meet the underwriting criteria of prime lenders and lenders mortgage insurance providers.

In contrast to US subprime, Australian non-conforming RMBS did not experience a significant rise in delinquencies and defaults following the financial crisis because Australia did not suffer the severe economic stress and house price declines of the US and UK.

The chart on the right from Moody’s show how house prices have stayed firm in Australia while the US and UK dipped:

“Currently, all Australian mortgage portfolios, including non-conforming RMBS are performing strongly, supported by the country’s low interest rate environment, stable economy and continued house price appreciation,” Moody’s said.

“If house prices in Australia fall sharply, or if Australia’s unemployment or interest rates rise significantly, we would expect such developments to translate to higher delinquencies and default rates on non-conforming mortgages.

“In addition, stronger competition in the non-conforming market in Australia could lead to a loosening of underwriting standards.”

Mortgage underwriting standards in Australia were tightened following the GFC including lowering maximum loan-to-value ratios, lowering maximum loan sizes and substantially restricting allowable adverse credit histories.

“While competition has been strong among non-conforming lenders in Australia post-2008, there has been no evidence of a loosening of underwriting standards to gain customers,” Moody’s says.

At the end of June, 30 plus day delinquencies for Australian non-conforming RMBS were around 3%, compared to 36% for US subprime RMBS, 25% for US Alt-A and 24% for UK non-conforming RMBS.

Source: Moody’s Investors Service

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