Suncorp recently announcement that repayments arein doubt on a $120 million mortgage bond.Mortgage bonds, a.k.a.mortgage-backed securities, are based on thousands of mortgages that banks lendand then bundle up together to on-sell to investors. The borrower continues torepay the bank, but the bank passes on the repayments to the bondholders.
Suncorp announced that for thebond in question, the proportion of borrowers in arrears on their payments by60 days or more has risen to 3 per cent, which is three times the rate ofarrears of Suncorp’s broader mortgage portfolio. This 3 per cent thresholdtriggers an automatic switch in how the bondholders are paid, with allinvestors receiving their interest payments, but principal repayments beingprioritised to those investors holding the most secure, AAA-rated tranche ofthe bond.
No Australian mortgage bondhas ever defaulted, but that is precisely the point—is this announcement thefirst sign of something unexpected?
Expert banking analysts have stated that itis “material” to Suncorp and the financial system.Suncorp’s announcement isreminiscent of the very first sign of the US sub-prime mortgage crisis thattriggered the global banking meltdown in 2008. On 8 February 2007, the giantBritish bank HSBC rocked the markets by announcing a large loss on its USsub-prime mortgage portfolio, caused by rising delinquencies on mortgagerepayments.
Again, it was unexpected. “This is a material negative surprise forHSBC”, a Merrill Lynch analyst told Market Watch that day. It was the beginningof the losses from borrowers falling into arrears on their mortgage repaymentsthat became the fuse that detonated the global financial system.
Most curious about Suncorp’s announcement is thatit regards a bond issued in 2010, which means that the borrowers have been ableto meet their repayments for close to a decade. So why have arrears spiked to 3per cent now? It coincides with the fall in house prices, which has alreadytrapped more than 400,000 households in negative equity and unable to refinancetheir loans. It also coincides with other signs of economic decline, includinga significant fall in new car sales in February.
If this is happening to peoplewho borrowed at much lower house prices in 2010, what about the more recentborrowers, including the wave of interest-only borrowers from 2012 to 2016?
Inher March 2018 submission to the banking royal commission, Denise Brailey ofthe Banking and Finance Consumers Support Association (BFCSA) exposed thetricks banks use to ensure that borrowers, who otherwise can’t afford theirloans, are able to initially make repayments that go to the bondholders ofsecuritised mortgages. These tricks involve giving the borrowers additional“buffers” for the first five years, including credit cards with $25,000 to$100,000 limits, buffer loans and top-ups, additional lines of credit, andrefinancing.
“If the applicant runs out of money to pay payments during thefirst five-year period, the top-ups keep rolling, increasing original debt byan average $150,000”, Brailey revealed.That is an extra $150,000 debton average for people who couldn’t afford the original debt in the first place,all to create a false sense of security for the bondholders who have bought thesecuritised mortgages. There is a critical mass of these fraudulent loans inthe system from 2012 onwards that were made for one purpose—to prop up thehousing bubble. If and when defaults rise in those mortgages, expect achain-reaction meltdown.
