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ISCOVER
Staff Reporter
Australia's mortgage insurance sector has been placed on negative outlook by Moody's Investors Service.
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Moody's made the announcement after it became concerned about the medium-term performance of the country's housing market and, consequently, future loss development of mortgage insurance portfolios.
"Although the financial metrics of rated LMIs suggest these firms are well-positioned for the current stable economic conditions, they are particularly exposed to tail-end outcomes in the Australian housing market," Moody's lead analyst for the Australian mortgage insurance sector Ilya Serov said.
"We believe there are meaningful uncertainties about such outcomes over the mid-term, placing downward pressure on the LMIs' credit profiles."
According to the rating agency, elevated housing prices and mortgage debt levels are a key vulnerability for the LMI industry.
Capital city prices have quadrupled and household indebtedness tripled in the last twenty years.
"House prices are currently undergoing a mild correction and have declined about 4 per cent from peak values. Our expectation remains that economic conditions will remain supportive in 2012, despite some weakening. That said, the potential for contagion from the Eurozone crisis represents a material downside risk, and the sensitivity of the mortgage insurers' portfolios to a serious economic downturn is yet to be tested at current house prices and levels of indebtedness," Mr Serov said.
Australian LMIs remain capitalised at a level above regulatory requirements. However on December 12, 2011, Moody's released a request for comment, outlining its proposal for changes to the default rate and house price stress rate assumptions underpinning its RMBS and LMI analysis, as well as changes to the methodology used in Moody's collateral analysis model.
"The revised assumptions under our "Severe Stress" scenario would suggest materially lower capital cushions for LMIs than those incorporated into the existing ratings", Mr Serov said.
Even if solid economic growth continues, the rating agency said the positive impact of the ongoing commodities boom in Australia is being offset by the effects of the strong Australian dollar, economic restructuring and deleveraging by both the private and public sectors.
"Certain industries and geographic regions are under significant pressure. As a result, default and delinquency rates in the mortgage market are likely to be variable regionally and increase on average over the next decade."
"At this stage, we do not anticipate that the negative outlook for the LMI sector will immediately affect the ratings of banks and building societies in Australia."
