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An uptick in non-conforming loan arrears from 2.66% to 3.2% in December is no cause for alarm according to specialist broker Ray Ethell, managing director of Sydney-based Non Conforming Loans.
S&P Global Ratings’ recent RMBS arrears statistics report noted the increase in December, alongside an increase in arrears from 0.65% to 0.76% in the prime mortgages category.
The ratings agency said the December arrears increases were “more pronounced than in previous years” after multiple interest rate rises were passed on to borrowers from May 2022.
December is typically a peak month for arrears increases, due to higher consumer spending during Black Friday sales and in the lead-up to Christmas and the summer holiday period.
Ethell (pictured above) said non-conforming arrears remain under the 10-year average of 4.5%, and are dwarfed by the highs of 2008 and 2009, when they increased to above 17%.
Brokers should look to the unemployment rate as a key indicator of future arrears levels, he said, as it was more people out of work that led to borrower struggles to repay their loans.
“Both interest rates and employment rates are rising off historical lows and remain below long-term averages, so I do not see arrears levels moving past the 10-year average,” Ethell said.
This would be challenged if the unemployment rate were to increase beyond current expectations.
“The RBA and Treasury expect the unemployment rate to peak at 4.5% over the next two years from the January published rate of 3.7%,” he said. “Notwithstanding this, there will be some borrowers whose finances are overextended with unsecured debts or who are coming off fixed rates that will go into arears.”
Ethell said Non Conforming Loans constantly reviewed its customer base to see if they can move to a prime loan, but had yet to see major changes to arrears levels.
Non-conforming lenders are also likely to help borrowers who do fall into arrears to get back on track, as they would prefer borrowers are put into a position to repay.
“As a mortgage broker, I speak to my clients regularly and am proactive about their problems by finding them solutions and helping them through what they are going through,” Ethell said.
“In the cases where the borrower is unable to catch up on arrears it is common for a non-conforming lender to refinance the loan. If they have overextended debt, we are also here to consolidate the debt and reduce monthly repayments.”
S&P Global said non-conforming loans make up about 10% of total RMBS loans outstanding, and non-banks continue to record the largest increases in arrears among RMBS originators.
“This is expected, given the sector's low seasoning and therefore higher proportion of borrowers with a limited repayment history,” S&P Global said.
The agency warned there was more arrears rises to come, due to the cycle peaking around January and February and borrowers dealing with increases in interest rates.
“Arrears are rising off historical lows and remain below long-term averages. But as interest rates continue to rise, this state of affairs is likely to change,” the report said.
Non-conforming borrowers are typically more highly leveraged and have fewer refinancing options that prime borrowers, which could exacerbate arrears, according to S&P Global.
“Arrears are likely to remain elevated for longer because non-conforming borrowers will find it more difficult to self-manage their way out of arrears.”
