SQM Research releases its 2019 Australian Mortgage Trusts Sector Review

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As part of its annual domestic mortgage trust sector review, SQM Research has released a sector report covering 12 recognised Australian Mortgage Trusts.

Managing Director of SQM Research, Louis Christopher said, “Australia’s mortgage trust sector has continued to record rapid growth over the past 12 months. We estimate the rise has been some 61% taking funds under management for the sector to over $10 billion dollars.

In our view, arrears in the sector have remained low, keeping overall default risk at bay. On a state basis, Western Australia is recording the highest arrears rates but it is the state with the lowest percentage exposure between the various funds.

While the lending book of mortgage trusts are dominated by Interest Only loans, the strict lending criteria applied by mortgage trusts reduces refinancing risk. LVRs are considerably lower compared to the broad market and the scrutiny applied on the borrower is also significantly higher.”

Overall, we have been impressed by the operation of the sector. Our view is that it is likely that a number of the currently rated funds may well receive ratings upgrades presuming a stable economy over the next six to twelve months.

The Mortgage Trust sector report has been split between pooled mortgage funds, contributory mortgage funds (peer-to-peer mortgage funds) and other related funds. Of the funds reviewed, five managers operate pooled mortgage fund structures and four managers operate contributory mortgage fund structures. One manager operates an RMBS while a final manager operates a mortgage insurance premium related fund.

Key points:

  • Arrears overall for the mortgage market remain muted with a low level of bad debt and nonperforming assets was less than 2% of total loans. It is noted that arrears are higher on elevated risk oriented funds such as funds with a high construction loan exposure.
  • There has been an increase in pooled mortgage products while peer to peer mortgage funds have received additional investor interest.

 

 

The following four funds operate contributory mortgage related structures (mortgage peer-to-peer).

 

 

A contributory mortgage fund (otherwise known as peer to peer) is structured to allow investors to acquire a fractional interest in a specific mortgage of their choosing. The structure allows investors to individually control their investments and invest only in a mortgage that matches individual risk and return profiles.

An RMBS is a residential mortgage backed securities fund where the underlying assets are a basket of tradable mortgages categorised into various risk tranches. The securities are usually issued by recognised banks and financial lending institutions.

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