Loan defaults on the rise
By George Lekakis
June 07, 2007 12:00am
AUSTRALIA'S leading mortgage insurers are feeling the pinch from rising home loan defaults, after insurance claims from banks and other lenders soared more than 500 per cent last year.
The two big mortgage insurers - Genworth and PMI - were hit by sharp rises in claims from home lenders according to 2006 accounts filed with the Australian Securities and Investments Commission.
Home lenders take out mortgage insurance on home loans to minimise potential losses from high risk home buyers who rely on borrowed money to fund more than 80 per cent of their home purchase.
Changes in the claims experience of mortgage insurers are an early pointer to the credit quality of home loans in Australia.
Home loan defaults on the rise
Mortgage insurers are among the first businesses to feel the negative impact of rises in home loan defaults and the 2006 accounts of PMI and Genworth confirm that the credit cycle has peaked.
More borrowers came under severe repayment pressure last year as property values in parts of Sydney fell 20 per cent and the Reserve Bank hiked rates.
The prospect of at least one more rate rise this year is likely to impose even more pressure on mortgage insurers.
PMI's net claims expense increased nine-fold to $64.1 million, while at Genworth net claims expense soared more than six times to $132 million.
The rises in net claims at both companies reflect the rise in payouts to lenders for bad loans and the need to boost provisioning to cover expected rises in defaults.
More defaults coming
PMI, which suffered a 30 per cent slide in its 2006 group profit to $80.6 million, expects the trend of rising default rates to continue in the medium term.
"Having had a seven-year period of favourable conditions the decline we're now seeing in home loan affordability has brought our default experience in line with long term trends," said PMI chief executive Ian Graham.
"We've taken a prudent position on provisioning to reflect the weakness in the Western Sydney property market."
Senior Genworth executive Peter Hall said his company had also boosted provisioning due to the weakening of Australia's property market.
"Management considers it appropriate to carry a higher provision for default," he said.
While not ruling out the possibility of premium increases, Mr Hall said it was unlikely.
"Default rates are now moving back in line with the long term trend for Australia and pricing is currently in line with that trend," he said.
"It (a premium increase) is not imminent but we do a pricing review each year that will take into account material changes."
Mr Graham agreed that there was "no pressure" on premiums at the moment.
The duopoly in the local mortgage insurance market is about to be challenged by US-based Mortgage Guaranty Insurance Corporation which recently secured regulatory approval to operate in Australia.
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