IO2PI rollover updates

Due to popular demand
creating a dedicated thread to track the changes happening in IO2PI rollover space.

here's the latest on this from CBA

• Preemptive switching has reduced (can't?)
• IO arrears(precursor to forced sale) has ticked up

 

Thanks for sharing @TheSackedWiggle. Great data.

Insights into the data I read completely the opposite to you.

My read of this data is that the main impacts of the IO2P&I issue has largely already played out at a macroeconomic level & price impacts have largely played out already. Notably prices have fallen a lot through this transition (whats directly accountable is hard to specify, but its likely played a role).

The key question I've got is what impact will it play going forward? On a macro level, the best way to read this data is by looking at the stock of IO debt vs new IO lending.

Ever since IO loans have been invented, there has always been scheduled IO2P&I. What made it an issue was higher lending standards & the quantum of IO loans that peaked in 2014/15/16. Today that quantum is low again...and it happened very quickly.

Overall the management of this looks very positive by the countries largest bank. Detailed data basically showing its nearly a non-issue now & thats largely been played out.

Arrears rate have barely moved and are coming from a negligible base & still at negligible levels. The stock of IO lending as a share of total lending has drastically come down to sustainable levels that everyone is comfortable with & there's been no material change at all to arrears rates/repayments/etc.

Key figures:

- total stock of IO debt is only 26%, converging with total new IO lending. This means most of the conversions have already happened on a macro level.

- The new IO lending and stock of IO lending is evening out. That means that at a macro level, IO lending expiries have little/no effect, their matched with new IO loans (renewals likely). There should be any consumption loss to the economy attached to this either. The overall stock of IO loans will likely level out at ~25%.

- Of all future expiries this year & next, nearly 40% are very well buffered or were done under stricter lending standards already. A large % of the remaining would service under more difficult lending standards too.

Overall, while the macroeconomic impact of the IO2P&I issue has played out, individual investors (this sites bread & butter) may have some issues managing their expiries over time & need detailed planning for this.

Westpac is the big one that holds more of the portfolio risk of this, so similar data would be interesting.

 

Actually just noticed the 26% figure isn't current, its '1H19'. Historical stock of IO issue will be a non-issue once it stabilises around new IO lending. Looks like it'll be there soon, but not there yet.

 

This thread is shrinking faster than Sydney property prices .

 

Are we talking about blind renewals without fresh assessments?

The issue with rollovers to begin with was that some IO investors whose rollovers are due can't qualify to renew under new assessment based on 'real not claimed expense' and are finding the switch and subsequent repayment rise unsustainable to carry on.

 

the IO loans expiring in 2019 would have been issued in 2014
and the ones next years in 2015.
When did closer scrutiny of real vs imaginary expense kicked in?
I thought it was early 2017?

What does reduction in numbers of preemptive switch of IO loans (with exorbitant rates) telling you?

 

Woops, seems IO2PI is not really an issue with so many over 6 months ahead of their payments.

And the uptick in arrears is due to denominator effect, due to reduction of IO loans.
Example: IO loans 42Bil, arrears 0.6B, delinquency 1.43%. New IO 25Bil, arrears 0.4B, delinquency 1.6%.

Numbers hey? They don't lie, and they are sayin IO2PI is being managed carefully. Its either we are a lucky country or our independent regulators are really, really good.

 

Mountain out of a molehill

 

I am a fan of APRAs use of macro prudential measure of cleaning the froth rather then bluntly using IR rate hikes.

What about 70% who do not not have that buffer?
it requires a mere 10% of these to be forced to sell to continue to downward momentum.

 

and yet Sydney has fallen so far so fast with no noticeable slowdown in momentum.
Sydney house price will be close to 15% fall from peak by end of this month or next.
Listings are rising fast its risen 22% in Sydney and 42% in Melbourne compared to same time last year, FONGO?

 

Im talking specifically about the macroeconomic impact of this issue & its impact on the housing market.

This issue has been massive for the past 18 months. Stock of IO loans falling from 40 to 26. Thats huge. ~15% of all mortgage holders have swapped repayment type.

This has already happened.

At the same time, prices have fallen 8% nationally.

Over the course of the next 12-24 months - the stock of IO debt that swaps to P&I will be around 0-5%.

You're talking about specific individual borrowers and the impact on them. I agree there'll be a lot of action here, particularly for investors who need to prepare and manage it. But when you put this into a macroeconomic context, the variable that matters is how much debt overall is going to turn & face higher repayments. Very little (compared to the past 18 months).

 

IMO I dont think this has been a small issue at all. In fact, I think it has been very large and part of the story about a 'drag on the market'. It was very much a debt issue. I'm also very surprised at how quickly its played out.

I thought it would've lingered into 2019-2020, not have effectively played out in a macro sense by first half of this year.

 

This is a good point too - the numbers of IO loans preemptevily swapping should be very low now, especially for CBA. For many loan products, the difference in pricing is now 0.05-0.10% vs 0.40-1% earlier in mid 2017. I.e. the incentive to swap has largely been removed.

 

By the way. Is the report available online? Would be great if someone drops a link. I’m interested in reading it.

 

ASX announcements - CommBank
look for 2019 Half Year Results Presentation

 

Thanks @TheSackedWiggle

 

Thought this thread that you started was about IO to P&I?

 

I don't think this is accurate stat for 'fongo'. Far fewer homes are being put up for sale, but taking longer to sell. Hence total stock on market is higher but new listings are lower.

 

What I have noticed is, though total IO loan originating in 2014/15 have decreased in size (due to preemptive rollover) the actual dollar value of 90+ arrears have not shrink-ed correspondingly though small this becomes interesting as the chances of new loan (shorter period based on strict assessment ) has very low chances of getting in to arrears this quick.

90 day IO arr-ear is now at 0.65bn for CBA, would be interesting what become of it in next 2/3 quarters.

 

For price to stabilise new listing has to drop dramatically,

Total listing for Melbourne from last year has jumped to 42%,
of course delays in sale is playing a role, but new listing to Melbourne from last year this time is just 15% lower,

for Sydney new listing is just 20% lower than last year this time,

If not of FONGO, if not of forced sale
why would one sell at a low point where buyers dictate the price?