While in the United States efforts to create more new-issue-rated RMBS are just starting to gain a little more momentum and the latest economic indicators at press time have not exactly been rosy, RMBS Down Under have been doing relatively well.
Australia “has been in some ways the least affected of the major RMBS markets, even to the extent where I’ve heard some Australians refer to the global financial crisis as the North Atlantic financial crisis,” Ian Linnell, Fitch’s global head of structured finance, told listeners in a recent conference call.
“If you include ABS, CMBS and RMBS, we have had more than $10 billion issued which is the most we’ve seen in a quarter since 2007 and its getting back toward the levels we were seeing in that time,” said Ben McCarthy, head of Fitch’s Asia-Pacific region structured finance unit, which the Australian market dominates.
Serious delinquencies, defined as 90 days past due, have “really bumped along the bottom” at 0.64%, McCarthy told conference call listeners. This compares to 2% in the United Kingdom and numbers “heading toward 12%” in the United States, he said.
McCarthy said Australia has conservative underwriting, citing the example of the average 50% loan-to-value ratio of loans held on bank balance sheets. He said it also has incentives to pay down owner-occupied loans and a relatively small nonconforming or subprime market coming in at roughly just 1% of mortgages.
In Australia, while like elsewhere there were liquidity problems due to the global financial crisis, Fitch since it began rating Australian RMBS in the late 1990s has never downgraded a deal for performance reasons, according to McCarthy.
“Why? That’s the question that we’re asking constantly,” he said, noting that the short answer is that since the fairly young RMBS market started in the mid-1990s there has been relatively little economic stress in Australia.
While global financial concern in 2008 affected its employment, and the dot-com bust in 2000 and 1998’s so-called Asian crisis had a significant impact on the country, McCarthy said the country did not have a “recession,” per se, during that span of time. That doesn’t mean it could never or has never happened, of course. As McCarthy notes, there was an Australian recession in the early 1990s.
He also noted that loans more than 30 days in arrears recently have been at a historical peak of 1.78% last seen in mid-2008. However, this trend is driven by changes in interest rates (the market is primarily a variable rate one) and affordability rather than any particular stress in the economy, he said.
Household debt has been rising in the country, affordability has dropped, and there have been rising property prices, McCarthy said. As a result Fitch has been recalibrating its Australian RMBS model and to bring it “in line with today’s market fundamentals” and stress testing ensure deals ratings remain insulated against the possibility of a bubble.
It sounds like Australia’s relative strength could be in danger of waning, but then again some market observers have been issuing such warnings since at least 2008. So the relative global attractions of its RMBS/real estate investments might hold some opportunity for certain investors for whom the aforementioned risk-reward factors meet their needs.
But for U.S. mortgage market participants who want to get in on the ground floor for more upside and can wait it out, U.S. RMBS might be preferable.