A new report from S&P has outlined the group's expectations that Australian mortgage arrears will likely start revealing the impact of COVID-19 in the fourth quarter of 2020.
The group has forecast arrears to begin surfacing in the second half of 2020, and losses to emerge in 2021; however, due to the varying extent the pandemic and its associated social distancing restrictions took hold across the country, arrears performance will likely vary by state and territory, reflecting their “different paths to economic recovery”.
S&P predicts arrear rises will be more more pronounced in Victoria and areas where tourism is a major employer.
The data also showed COVID-19 hardship arrangements peaked in June, as lenders began to report falls in July as much of the country reopened their economies; however, the group expects Victorian borrowers to remain under COVID-19 hardship arrangements for some time.
The S&P Performance Index (SPIN) for Australian prime mortgages decreased to 1.34% in June from 1.40% a month earlier; while the group acknowledged some of the states eased restrictions in that month and the fall in prime arrears could indicate this, the movement also seems to have been driven by originators' reporting practices in the wake of COVID-19's onset.
Reflecting the increased refinancing activity during the first half of 2020 as borrowers took advantage of low interest rates, prepayment rates have held up so far with prime and nonconforming rising in the second quarter.
Moving ahead, S&P foresees property market dynamics to vary as well, reflecting each area's different industry and economic profile, which will also influence the level of losses in the event of borrower defaults.
However, the Australian RMBS sector's relatively modest loan-to-value ratio profile will help to minimise losses in the event of borrower default.
