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Japan Private-Sector RMBS Performance Watch: Rate Hike Has Limited Impact

Underlying asset performance of Japanese private-sector residential mortgage-backed securities (RMBS) transactions should remain stable.   S&P Global Ratings' economic forecast as of March 2024 is for a gradual rise in interest rates to 1.0% through 2027 as the Bank of Japan (BOJ) normalizes its interest rate policy. However, we believe a rise in interest rates will have limited impact because most remaining transactions in the index pool are backed by fixed-rate loans. We forecast the pace of inflation in Japan will fall gradually by 2027. Therefore, we think it is unlikely to hurt the performance of underlying mortgage assets. In our view, the unemployment rate is a key driver of residential loan performance. We project Japan's unemployment rate will remain below 3% through 2027. Given the unemployment rate is a primary factor in forecasting mortgage performance, a low unemployment rate supports performance of residential loans.

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% since 2004, but it declined moderately from August 2021 and has remained stable at about 0.05% since February 2023. We attribute this to certain underperforming transactions that were fully redeemed from May 2019 to January 2021 and RMBS transactions added to the index pool in recent years that were predominantly high credit quality transactions. 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 0.12% in the past year (chart 4).  The rate had stayed between 0.20% and 0.25% since 2010, but it has gradually declined since May 2019 and has remained at about 0.12% since January 2023. As with the default rate, this is partly due to improvements in the attributes of the index pool as certain underperforming transactions have been fully redeemed.

Excluding fully redeemed underperforming transactions, the delinquency rate increased from 2018 and gradually decreased from April 2020 (chart 9).  We believe the downward trend since 2020 reflects improved performance mainly resulting from fading effects of the COVID-19 pandemic.

Prepayment rate

The prepayment rate on a 12-month moving average basis has been below 4% since March 2023 and was at an all-time low as of January 2024 (chart 6).  The rate peaked at about 13% in February 2017. We attribute this to a significant increase in refinancing following the BOJ's introduction of a negative interest rate policy in January 2016. Since March 2023, the rate has begun to decline as refinancing has come to halt and has remained below 4%. In a rising interest rate environment, obligors have little incentive to refinance fixed-rate housing loans originated at low interest rates in the past. Accordingly, we think the prepayment rate will remain low for a while.

Performance

Default rate

Chart 1

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Chart 2

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Chart 3

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Delinquency rate

Chart 4

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Chart 5

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Prepayment rate

Chart 6

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Chart 7

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Reference

Chart 8

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Chart 9

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Index Pool Outline

Chart 10

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Chart 11

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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 January 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

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Taku Shiozawa, Tokyo + 81 3 4550 8666;
taku.shiozawa@spglobal.com
Secondary Contact:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
hiroshi.sonoda@spglobal.com

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