Key Takeaways
- Japanese private-sector RMBS have performed stably despite market upheaval.
- Default and delinquency rates remain low.
- Underlying asset performance looks likely to remain stable, though the risk of stress factors endures.
Underlying asset performance for Japanese private-sector RMBS transactions should remain stable. This is because we expect Japan's unemployment rate to remain stable at low levels. We believe this rate is a key factor for future residential loan performance. However, the impact of changes in the market environment that have an impact on underlying asset performance could materialize. We are closely watching rising consumer prices, growing geopolitical risks, and a resurging pandemic.
Observations
Default Rate
The annualized 12-month moving average default rate has stayed fairly stable at around 0.1%-0.2% since 2004. It has gradually declined since reaching a recent peak of 0.14% in August 2021. This is partly because some underperforming transactions were fully redeemed after 2019, improving the average credit quality of the remaining transactions in the index pool (chart 1). When excluding these fully-redeemed underperforming transactions, the annualized 12-month moving average default rate stands at around 0.1% since 2004 (chart 8).
Delinquency Rate
The index pool's 12-month moving average of the two-month delinquency rate has recently trended at around 0.15% following a gradual decline since 2020. This is partly because, as with the default rate, some underperforming transactions have been fully redeemed. The rate had remained basically flat at around 0.25% since 2014 (chart 4).
When excluding fully-redeemed underperforming transactions, the 12-month moving average of the two-month delinquency rate stood at around 0.15% in recent years. It gradually turned up around 2018 after hovering at about 0.1% from 2010 (chart 9). We attribute this higher delinquency rate to a slight deterioration in performance stemming from a combination of two factors: The pandemic and an increase in delinquencies as average seasoning increased for the underlying loans in the pool.
Prepayment Rate
The prepayment rate on a 12-month moving average basis has been stable at a record low level of around 4% since 2019. In particular, the prepayment rate has been low for transactions backed by low-interest loans originated after the introduction of the negative interest rate policy by the Bank of Japan in January 2016 (chart 6). This is because obligors have little incentive to refinance.
Any rise in market interest rates will restrain increases in prepayment rates of the index pool, in our view. Most loans in the index pool are fixed-rate loans. In general, any rise in market interest rates reduce the incentives for obligors to refinance.
Performance
Default rate
Chart 1
Chart 2
Chart 3
Delinquency rate
Chart 4
Chart 5
Prepayment rate
Chart 6
Chart 7
Reference
Chart 8
Chart 9
Index Pool Outline
Chart 10
Chart 11
Notes
- In this report, S&P Global Ratings describes the combined performance trend of pools of all the residential mortgage-backed securities (RMBS) transactions it rates that companies in Japan's private sector originated (the index pool). We included data from collections through August 2022.
- In this report, transactions S&P Global Ratings rates include transactions that S&P Global SF Japan Inc. (SPSF) rates. SPSF is a registered credit rating agency under Japan's Financial Instruments and Exchange Act (FIEA) but is not registered as a Nationally Recognized Statistical Rating Organization (NRSRO) under U.S. laws. Therefore the credit ratings assigned by SPSF are Registered Credit Ratings under FIEA but are not Credit Ratings issued by an NRSRO under U.S. laws.
- In this report, all the underlying asset pool of each RMBS are regarded altogether as one pool, the index pool. We calculate the index pool's performance with data in a dynamic format at certain points and also in a static format, under which the outstanding balance of receivables declines as time passes, once a certain amount of time has passed since transaction closures. Charts in the report that show data on a monthly basis do so up to the 150th month. This is because the limited number of transactions aged over 150 months in the index pool makes it more susceptible to individual transaction volatility after this period.
- To calculate delinquency rates in this report, we define delinquent receivables as loans that are two payments overdue.
Appendix: Calculation Of Indices
Default rate (annualized)
The default rate is the weighted average of the default rates of the individual deals of the pool for a term--"t". In many transactions, a loan is considered in default when the obligor misses three to seven payments.
Default rate for "t" = Amount of defaulted receivables for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) X 100 X 12
Cumulative default rate
The cumulative default rate is the weighted average of the cumulative default rates of the individual deals of the pool for a term--"t".
Cumulative default rate for "t" = Cumulative default amount from transaction issuance to the end of term "t" (principal)/initial receivables outstanding (principal) X 100
Delinquency rate
The delinquency rate is the weighted average of the delinquency rates of the individual deals of the pool for a term--"t".
Delinquency rate for "t" = Amount of delinquent receivables (two payments missed) for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) X 100
Prepayment rate (annualized)
The prepayment rate is the weighted average of the prepayment rates of the individual deals of the pool for a term--"t".
Prepayment rate for "t" = Amount of prepaid receivables for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) X 100 X 12
Related Criteria
- Methodology And Assumptions For Rating Japanese RMBS, Dec. 19, 2014
Related Research
- Performance Watch: Japan Private-Sector RMBS' Pandemic Chapter Closing? May 31, 2022
- How Will COVID-19 Affect Japanese Structured Finance? April 8, 2020
This report does not constitute a rating action.
| Primary Credit Analyst: | Hiroshi Sonoda, Tokyo (81) 3-4550-8474; hiroshi.sonoda@spglobal.com |
| Secondary Contact: | Toshiaki Shimizu, Tokyo + 81 3 4550 8302; toshiaki.shimizu@spglobal.com |
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