Australian covered bonds will benefit from guidelines announced by the Australian Prudential Regulatory Authority last week on modified mortgages as they will ensure that ADIs do not issue covered bonds against mortgages that have been delinquent for more than 90 days, Moody’s said today (Thursday).

The guidelines, announced by APRA on Wednesday of last week (9 August), are aimed at ensuring industry-wide consistency in the reporting of modified mortgage, said the rating agency.

“The new guidelines are credit positive because they ensure that mortgages supporting covered bonds will not include 90-plus mortgages, thereby improving the credit quality of mortgages covering the bonds relative to today and increasing the likelihood of repaying the bonds from the sale of the mortgages, if a bank defaults,” said Jennifer Wu, vice president, Moody’s.

“Currently, Australian banks are inconsistent in how they report modified mortgages, which results in under-reporting of 90-plus mortgages and including them as eligible mortgages for covered bonds.”

Differences in reporting have stemmed from the way in which lenders do or do not include a 90 day “hardship period” in their calculations of how delinquent a mortgage is. During the hardship period borrowers may not have to make payments, and some lenders have therefore excluded these 90 days from their reporting of how long a mortgage has been delinquent. For example, if a borrower does not make a payment 30 days after the end of the hardship period, such a mortgage could previously have been described as 30-plus, but now it will have to be reported as 120-plus, according to Moody’s.

“By ensuring banks report non-performing mortgages in a uniform manner, the guidelines are credit positive for Australia’s banks because they provide a consistent basis for calculating loan-loss provisions,” added Wu. “However, banks currently apply additional stresses to their existing provisioning models to capture future losses in mortgage portfolios, and so the guidelines will not likely lead to large increases in overall provisions.”