Key Takeaways
- Default and delinquency rates of underlying assets have remained low, and a stable labor market will support performance.
- The prepayment rate will remain low amid an increase in interest rates.
- We closely monitor market trends as the number of loans with a maturity of more than 35 years rises.
A stable labor market will underpin underlying asset performance of Japanese private-sector RMBS transactions, which remains robust. S&P Global Ratings expects Japan's consumer price index to be between 1% and 3% through 2027. We believe this will have a limited impact on borrowers' ability to repay, given the recent rise in nominal wages. We expect the unemployment rate to remain low and stable at 2.5% through 2027. We believe a stable labor market will support underlying asset performance of residential mortgage-backed securities (RMBS) transactions. In addition, while most of the index pool currently consists of loans with a maturity of 35 years or less, we closely monitor market trends as there is an increasing number of loans with a longer maturity.
Observations
Default rate
The annualized 12-month moving average default rate has remained stable at about 0.05% in the past year (chart 1). The rate had hovered at 0.1%-0.2% from 2004, but began declining moderately in late 2021. We attribute this to certain underperforming transactions that were fully redeemed from 2019 to 2021. Excluding fully redeemed underperforming transactions, the default rate has been fairly stable at about 0.1% since 2004 (chart 8).
Delinquency rate
The index pool's 12-month moving average of the two-month delinquency rate has remained stable at about 0.1% in the past year (chart 4). The rate was around 0.3% in 2019, and has gradually declined since then. As with the default rate, this is partly due to an improvement in the attributes of the index pool as certain underperforming transactions have been fully redeemed. Excluding fully redeemed underperforming transactions, the delinquency rate has been stable between 0.1% and 0.15% (chart 9).
Prepayment rate
The prepayment rate will remain low amid an interest rate increase (chart 6). The rate peaked at about 13% when refinancing increased after the Bank of Japan (BOJ) introduced its negative interest rate policy in 2016. The rate has been around 4% since 2019 as refinancing has come to halt. We expect the BOJ policy rate to rise gradually to 1.0% towards 2027. In a rising interest rate environment, borrowers have little incentive to refinance fixed-rate housing loans originated at low interest rates in the past. We think the prepayment rate will remain low for a while since most of the index pool is backed by fixed-rate loans.
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
1. In this report, S&P Global Ratings describes the combined performance trend of pools of all 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 July 2024.
2. 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.
3. In this report, all underlying asset pools 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 as one closed pool in which the outstanding balance of receivables declines over time. Charts in the report that show data monthly 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 volatility of individual transactions after this period.
4. 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
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Asia-Pacific Supplement, April 4, 2024
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
Related Research
- Japan Private-Sector RMBS Performance Watch: Rate Hike Has Limited Impact, April 30, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Shota Tatewaki, Tokyo + 81 3 4550 8276; shota.tatewaki@spglobal.com |
| Secondary Contact: | Hiroshi Sonoda, Tokyo (81) 3-4550-8474; hiroshi.sonoda@spglobal.com |
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