Subprime Delinquencies Rising Down Under Too

Securitized loan performance show that delinquencies in the Australian nonconforming housing sector have exceeded 6%, according to Moody's Investors Service.

During the second quarter, average nonconforming RMBS delinquencies greater than 90 days past due jumped to 6.5%, compared with 5.97% and 4.63% for the same period in 2006 and 2005, respectively.

"Australia's nonconforming RMBS market experienced a record year of issuance in 2006, with securitization volumes reaching A$5.5 billion ($4.52 billion), compared with A$4.2 billion ($3.45 billion) in 2005.

"The [Australian] nonconforming sector continues to evolve with its product offering becoming more and more diverse," said Ilya Serov, a Moody's analyst and author of a second-quarter review on the topic, in a company press release.

"Delinquency rates have trended upwards for the past 18 months as a result of rising interest rates, riskier trends in mortgage origination and high levels of household indebtedness," the analyst said.

"The impact of the August 2007 interest rate rise has not yet become reflected in borrower behavior," the analyst also said. "There is a natural lag between rate rises and changes in borrower behavior and, as such, we expect the negative performance trend to continue."

However, "balancing this trend is Australia's record low unemployment rate, which ensures that while some borrowers are coming under increased pressure, the absolute level of defaults and personal bankruptcy is still low," said the analyst. "Moreover, Moody's considers that despite some deterioration in performance, the Australian nonconforming sector remains distinct from the U.S. subprime mortgage market."

The analyst distanced the performance concern from the U.S. subprime mortgage woes that have crunched credit in global markets.

"While nonconforming loans are the nearest thing in Australia to subprime loans, it is evident that Australian borrowers are not experiencing the stress seen in the U.S.," the analyst said.

"And even though interest rate rises are undoubtedly putting some households into difficulty, we are operating in an environment of very low unemployment and comparatively stable house prices, making a sharp rise in defaults less likely at this point," the analyst added.

The Australian nonconforming lending market is defined by Moody's as "loan products which fall outside the scope of lenders mortgage insurance due to certain risk factors and because its loans are made to borrowers with adverse credit histories.

"Historically loans to borrowers with such track records -- comparable to those of U.S. subprime borrowers -- have formed a relatively smaller segment (30%-35%) of the Australian nonconforming market," Moody's added. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/