It is hard to not laugh out loud at the amazing stupidity of those who say “It’s Different Here”.

Please consider ‘Low-doc’ home borrowers hit by rising rates

A new report shows a sharp increase in the number of ‘low-doc’ borrowers struggling to keep up with their mortgage repayments as interest rates rise.

Adjusted for loans that passed from being in arrears to being settled because the property was sold, the percentage of prime loans more than 90 days in arrears increased from 1.33 per cent in the June quarter to 1.37 per cent in the three months to the end of September.

However, Fitch says self-employed borrowers have been hit hard, which has pushed arrears among prime low documentation loans to a record 3.97 per cent – slightly higher than the previous peak of mortgage delinquencies in this segment reached during the peak of the financial crisis in the December quarter of 2008.

The associate director in Fitch’s structured finance team James Zanesi says higher mortgage repayments appear to be hitting the self-employed sector much harder than employees.

“The three consecutive cash rate hikes ending in May 2010 modestly affected Australian prime mortgage performance in the third quarter of 2010. Households have demonstrated some stability in spite of the higher mortgage payments,” he said.

The very worst performance in the September quarter continued to be amongst the closest equivalent Australia has to subprime loans – ‘low-doc, non-conforming’ borrowers.

The arrears rate amongst this group was 18.94 per cent, although it makes up a relatively tiny proportion of Australian mortgages.

Progression of Rot

Australia is starting to get hit hard but the important word in this sentence is starting. Rot starts at the edges and the outside periphery (subprime and low-doc), then spreads to the core.

The party is now over as I mentioned in Partied Out: A Recap of Australia’s Now Imploding Housing Bubble; Property Bull Offers Jeremy Grantham $100m Housing bet, Party is Not Over

US Graphs, Statistics

Here is a nice set of US stats and graphs from the LPS Mortgage Monitor: October 2010 “Dashboard” that depicts where Australia will eventually head.

Total Delinquencies

Delinquencies remain about 2.7 times historical average, foreclosure inventories are 7.4 times and rising.

October Month-End Data: Conclusions

  • Foreclosure inventories continue to grow, the rise in delinquencies remains subdued as a result.
  • Accelerated foreclosure activity has led to a rapid decline in agency delinquencies. Foreclosure inventories have risen dramatically as a result.
  • Most western states have experienced a decline in the total 30 day and foreclosure inventory over the last six months.
  • The issue of current loans going delinquent remains, however more and more sixty day defaults are repeats.
  • Modification dominated seriously delinquent cures have declined over the last several months but still remain elevated.
  • More six and 12 month delinquent loans are moving to foreclosure, but the extremely delinquent category continues to grow.
  • Foreclosure sales dropped sharply, down 35 percent nationwide. Impact was across all investor categories.
  • Origination activity continues to accelerate with the government percentage declining. High quality lending is yielding the best vintage performance in years.

The housing rot in OZ has just started and it’s a long way to the core. But it will get there. Australia can look forward to similar stats in years to come.

Mike “Mish” Shedlock
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