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Showing posts with label Reserve Bank of Australia. Show all posts
For the first time, a unique report on the
Australian mortgage market has been published by the Reserve Bank of Australia
which reveals disturbing details on intrinsic market risks. An estimated 72,000
home loans between 2009 and early 2014 have been analyzed and the report
findings showed that borrowers with a higher LVR (loan to valuation ratio) loan
were more than three times to fall behind in their repayments.
An estimated 1,300 of the 72,000 home loan samples
analyzed were found to be in arrears by more than 90 days at some point of the
loan term. But loans with LVR between 90% and 100% are estimated to be 3.5
times more likely to enter into arrears compared to loans with LVR of less than
60%.
The report findings indicate only a non-linear
increase of the risk of entering arrears. And the subhazard or risk is
specifically high for loans with LVR between 90% and 100%. Loans with LVR
between 80% and 90% are found to have a subhazard of entering arrears by 1.1
times more than loans with LVR between 60% and 80%. In other words, loans with
higher LVR tend to enter into arrears more than loans with lower LVR, according
to Matthew Read, Cianni La Cava, and Chris Stewart, officials of the Reserve
Bank of Australia.
The RBA report, Mortgage-related Financial Difficulties:
Evidence from Australian Micro-level Data which was released on November 26th is
the first-of-its-kind paper to use micro-level data to quantitatively analyze
financial difficulties in Australia that are mortgage-related.
The distinctive report found evidence that suggests
significant correlations between ability-to-pay and equity factors, and the
incidence of mortgage stress.
Additionally, it established that slower repayments
indicate that an increase in interest-only loans means an equivalent increase
in risk even if interest-only loans are not as likely to enter into arrears.
What had been found to more likely enter arrears are low-doc loans compared to
other types of loans even if strict screening on the borrower’s employment
status was made.
Such clearly suggests that sound income
documentation and verification policies should be maintained by lenders and
with the supervisors continuing to monitor developments in order to ensure
timely payment of loans.
With the report’s findings, the Reserve Bank of
Australia could use the data as an input that would help Australian banks and
mortgage lenders to determine and test the risk level of their home loan
exposures. Australia’s central bank also believes the report findings and
information would be helpful in framing the design of the prudential policy
structure. In essence, RBA can use the information to help make informed
decisions about the risk level lenders, investors and regulators are willing to
accept.
