Repayment rate for Japanese RMBS hits a record low – report

The low mortgage repayment rate in Japan has slowed the deleveraging pace of certain RMBS deals.

Repayments for residential mortgage-backed securities in Japan has become slower as of August, which is impacting the deal deleveraging pace of certain RMBS vintages, according to Moody’s sector analysts.

As of August, the average principal payment rate for Japanese RMBS declined to a record low rate of 0.66 percent, showed the latest report published by the ratings agency yesterday. This 12-month moving average rate has been on a downward trend since February 2017, when it peaked at about 1.4 percent.

The report also showed that RMBS deals closed before 2012 had mortgages interest rates in the 2.5 percent range whereas newer deals closed from 2012 are bearing lower rates, in the 1.25 percent range as of August.

Notably, deals with excess spread – where the amount of interest collection is greater than expenses and dividend payments – is expected to benefit from the lowest repayment rate.

However, those with negative carry are set to face implications as the low principal payment rate lengthens the life of the structured credit products, according to Moody’s analysts. They say it is because mortgages in Japan tend to have equal monthly payments over the life of a loan.

Other factors that impact RMBS performance include the loan repurchase rate. Still, loan repurchases contribute a small share of the principal payment rate with regards to Japanese RMBS deals, according to the analysts.

The latest data on monthly loan repurchase activities show that the repurchase rate was in the range of 0.02 percent to 0.04 percent during June to August this year.

The repurchase rate in rated RMBS increased to 0.35 percent in May this year from 0.10 percent in December 2019.

Changes in loan repurchase activities can imply originators’ behavioural change as they can remove potentially delinquent or modified loans from securitised pools before they default, said Moody’s in another report in July.

The latest assessment was based on the ratings agency’s RMBS performance pool. It consists of 106 transactions originated in Japan with an outstanding balance of ¥3.8 trillion ($36.1 billion; €30.8 billion).