Fitch’s: Residential Mortgage-Backed Securities “Negative”, Threat To Banks

21 May

Uh-oh.

Haven’t we already had enough worrying announcements over this past week?

To top things off, Fitch’s ratings agency has reclassified 54 tranches of Australian residential mortgage-backed securities (RMBS) from ratings watch “stable”, to “negative”:

Cash-strapped borrowers and tight-fisted mortgage insurers are a greater threat to Australian banks than previously thought, says a major ratings agency.

New information shows that Australian mortgage insurers, which secure loans for banks and other lenders, do not always pay the full outstanding amount of mortgages when they fall over which can leave banks out of pocket, according to ratings agency Fitch.

Based on its findings, Fitch moved 54 tranches of residential mortgage backed securities (RMBS) from ratings watch “stable” to “negative”. Mortgage backed securities are home loans which are bundled together and sold to institutional investors by banks and mortgage lenders.

Banks fund mortgages through issuing RMBS, which are rated by credit ratings agencies like Fitch, Moody’s and Standard & Poor’s for their quality and likelihood of being repaid. RMBS lay at the heart of the subprime crisis in the US, when major banks and investors poured billions of dollars into mortgage debt which turned out to be lower quality than thought.

The new ratings account for about half of Australia’s national securitised mortgage market. Each transaction is made up of multiple tranches that attract a different rating based on their underlying credit quality.

“Rating watches indicate that there is a heightened probability of a rating change and the likely direction of such a change,” according to data from Fitch’s website, with “negative” denoting a potential downgrade.

Commonwealth Bank chief executive Ralph Norris recently noted a 11 per cent increased in delayed payments on mortgages in the March quarter following the big rise in lending for first home buyers around the time of the financial crisis. ANZ Bank and Westpac have reported similar upticks.

We have been covering the other, even greater risks to Australia’s banks in recent posts (here, here, and here).

What concerns most about this announcement, is the implications for the $20 Billion worth of RMBS’ that the Labor government has purchased, and continues to purchase, in their efforts to keep propping up our housing bubble.

It’s been quite a week.

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4 Responses to “Fitch’s: Residential Mortgage-Backed Securities “Negative”, Threat To Banks”

  1. JMD May 21, 2011 at 10:44 am #

    “RMBS lay at the heart of the subprime crisis in the US, when major banks and investors poured billions of dollars into mortgage debt which turned out to be lower quality than thought.”

    “quality and likelihood of being repaid” – quality IS the likelihood of debt being repaid.

    This can also be applied to government debt. Bureaucrats are neither alchemists nor gods, they cannot turn lead into gold or one loaf into thousands. The debt of the US in particular will never be repaid, in fact the US has never had any intention to repay since at least 1971.

    The quality of government debt is vastly overrated, yet it is the used as the benchmark or ‘risk free asset’ against which all other debt ‘monies’ are measured.

    The rating agencies have little integrity. While RMBS might be junk, it’s no worse than government paper.

    • JMD May 21, 2011 at 10:45 am #

      Is Barnaby going to come out & tell is like it is?

    • The Blissful Ignoramus May 21, 2011 at 11:09 am #

      >quality IS the likelihood of debt being repaid.

      Correct.

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