Ind-Ra:
Conservative Lending Standards, Stable Interest Rates Crucial to Mortgage
Performance
Conservative
underwriting standards are crucial to the performance of mortgage loans, says
India Ratings & Research (Ind-Ra). Moreover, a hike in interest rates
beyond a certain threshold leads to accelerated fresh delinquencies in loans
that are otherwise performing.
A
study of loan performance in the 3 year
period of rising interest rates from 2010 to 2013 suggests the loans that faced
over 2 % hike in rates were 50 % more delinquent than average during the same
period. The study included only those loans that were making timely repayments
at the beginning of the rate hike cycle.
While
studying the impact of underwriting standards, both instalment-to-income ratio
(IIR) and loan - to - value (LTV) ratio were found to be important predictors
of mortgage delinquency.
“Loans
to residential mortgage borrowers whose repayments were above 50 % of their
income were found to be riskier, with delinquency rates almost 35 % higher than
average” says Mr. Purav Shah, Associate Director, Structured Finance at Ind-Ra.
Likewise,
borrowers who contribute over 40 % towards the purchase of a dwelling unit (LTV
below 60 %) have shown greater willingness to pay, with about 25 % lower
delinquency rates than the average. While high delinquencies were observed at
high LTVs, underwriting practices have been made stringent for loans with LTV
over 80 % by limiting IIRs to 50 % for such loans.
A
study of borrower characteristics suggests that loans to self-employed
borrowers are 50 % more susceptible to default than those extended to salaried
customers because of higher income volatility, which is accentuated during
economic downturns. The higher credit risk of self-employed borrowers was
observed to be priced in by lenders with the average rate of interest charged
being 50bp higher than that offered to salaried customers for a similar vintage
of mortgage origination.
The
report findings are based on a loan-level analysis of the agency’s rated
residential mortgage-backed securities portfolio over 2008-2013, representing a
full economic and interest rate cycle. Although the broad trends are still
likely to remain valid, the delinquency factors may significantly vary for
loans and lenders from those studied in Ind-Ra’s rated universe.
Contacts:
Purav
Shah
Associate
Director
+91
22 4000 1764
India
Ratings & Research Pvt. Ltd.
Wockhardt
Towers, 4th floor, West Wing
Plot
C-2, G Block. Bandra Kurla Complex
Bandra
(East), Mumbai-400051
Jatin
Nanaware
Director
+91
22 4000 1761
Sandeep
Singh
Senior
Director
+91
22 4000 1735
Media
Relations: Saraanya Shetty, Mumbai, Tel: + 91 22 4000 1729, Email:
saraanya.shetty@indiaratings.co.in.
Additional
information is available at www.indiaratings.co.in.
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