Ratings agency says rising rates no barrier to RMBS market

By By Luke Cornish, Broker News, 8 April 2010

Moody’s rating agency has said that the Australian RMBS (Residential Mortgage Backed Securities) market is strong enough to withstand the Reserve Bank’s tightening policies and that there is little chance of a surge in delinquencies or downgrades.

Moody senior analyst Arthur Karabatsos said most borrowers should be able to absorb higher rates, adding that most borrowers have already shown they can cope with their mortgage payments as rates tick up to normal levels.

“The neutral setting is believed to be around 5%, if official interest rates rise a further 0.75 percentage points to this level, delinquencies in the Australian RMBS sector are unlikely to significantly increase,” Karabatsos said.

If the RBA brings the cash rate to 5% by the end of the year, it would still be 2.25% below its level in March 2008. The report said that the 2.25% buffer would save borrowers $415 per month on a $300,000 mortgage over 25 years.

However, Karabatsos clearly did not take into account the rate rises that banks have implemented over and above the cash rate and their failure to pass on the full cut when rates were falling. So the effect on an average borrower would be much smaller.