RDP 2020-03: The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis 4. Stylised Facts

The stylised facts in this section are consistent with the double-trigger hypothesis; arrears rates have a positive relationship with regional unemployment, and foreclosure rates are higher for loans with negative equity. But econometric modelling is still required to separately identify the two distinct triggers, not least because the regional incidence of unemployment and negative equity are correlated.

4.1 Entries to Arrears are Correlated with Regional Unemployment Rates

At the region level, entries to 90+ day arrears are positively correlated with unemployment rates; both tend to be higher in mining-exposed regions (Figure 4). The regions with the highest shares of loans entering arrears are ‘Outback Western Australia’ (particularly the Pilbara), ‘Outback Queensland’ and Mackay.

Figure 4: Regional Arrears and Unemployment
Loans originated since 2013
Figure 4: Regional Arrears and Unemployment

Notes: Entries to arrears are averaged over 2015–19; 2016 unemployment rate by usual place of residence in 2011; SA4 regions

Sources: ABS; Author's calculations; RBA; Securitisation System

4.2 Loans with Negative Equity are More Likely to Transition to Foreclosure

Transitions of loans from arrears, and the time they take to transition, are a function of both borrowers' and lenders' actions. In Australia, lenders issue borrowers with a notice of default once a loan enters 90+ day arrears (ASIC nd). Lenders may commence legal action to repossess the property if the borrower does not become fully current on their mortgage payments within the notice period, which is at least 30 days. The loan is defined as being in foreclosure once the ownership of the property has been transferred to the lender, and the lender will then make arrangements to sell the property. The lender may seek a court judgement for recourse to the borrower's other assets if the sale price of the property is insufficient to cover the amount owing plus foreclosure costs.

Under Australian consumer credit protection regulations, borrowers may submit a hardship application to their lender following the receipt of a notice of default, outlining why they are experiencing repayment difficulties, how long they expect their financial difficulties to continue and how much they can afford to repay. Lenders are required to consider hardship variations where cases are deemed to be genuine and meet certain requirements, and to provide alternatives such as repayment holidays or an extension of the loan term. Lenders will also typically delay legal proceedings when borrowers provide evidence that they are in the process of selling their property.

The transitions of loans from arrears are highly correlated with the loans' equity positions as at the time they entered arrears (Figure 5). Most loans with positive equity eventually cure (defined as becoming fully current on their scheduled payments) or are fully repaid (i.e. resolved through the borrower selling the property or refinancing). On the other hand, the share of loans that go on to foreclose is increasing in the degree of negative equity, as the borrower cannot profitably sell their property to avoid foreclosure and the probability that the value of negative equity exceeds the cost of foreclosure increases with the extent of negative equity. Loans in arrears that are deeply in negative equity have around a 50 per cent probability of eventually transitioning to foreclosure. Some readers may be surprised that this share is not higher; perceived foreclosure costs, full recourse to other assets (including other properties) and borrower expectations of a future housing price recovery may be contributing factors.[6]

Figure 5: Transitions from 90+ Day Arrears
Share of loans that have transitioned from first arrears event
Figure 5: Transitions from 90+ Day Arrears

Note: Final status of loans (excludes loans that remained in arrears at last observation)

Sources: Author's calculations; CoreLogic data; RBA; Securitisation System

Although foreclosure rates are higher for loans with high LVRs, by number the majority of foreclosed loans appear to have slightly positive equity when they enter arrears. Several factors may explain this, including that equity may have been mismeasured. Mismeasurement could occur if the loan balance does not capture all debts (such as subsequent accumulated balances in arrears or the presence of other debts) or because the property valuation is only an estimate. Nonetheless, it appears that some loans proceed to foreclosure with positive equity.

Transitioning from arrears can be a slow process. Among loans that transition from arrears within the sample period, the median loan that fully repays (refinances or sells the property) takes three months to do so, while the median loan that either cures or enters foreclosure takes six months to do so (Figure 6). Some loans take significantly longer to transition from arrears. Restructuring arrangements arising from hardship applications may assist loans with curing (fewer loans with restructuring arrangements proceed to foreclosure), but may also prolong the time a loan spends in arrears. More generally, lenders may exercise some degree of leniency when they expect to receive better rates of return through the borrower resolving their situation than through a forced sale.

Figure 6: Cumulative Transitions
Transitions of securitised loans in 90+ day arrears, by indexed LVR
Figure 6: Cumulative Transitions

Note: First arrears events

Sources: Author's calculations; CoreLogic data; RBA; Securitisation System

While foreclosures in the absence of 90+ day arrears are relatively rare, in line with banks' standard foreclosure procedures and the double-trigger hypothesis, they do occur. Around 4 per cent of foreclosures occur without a 90+ day arrears spell being observed during the sample period; most of these loans appear to have a prolonged history of multiple arrears spells of less than 90 days.[7]


This figure is based on the indexed LVR at the point of entering arrears; results are little changed after accounting for subsequent changes to housing prices. It is possible that borrowers with substantial negative equity may still choose to cure if they expect housing prices to subsequently recover. [6]

This may also reflect loans entering foreclosure in the same reporting month as entering 90+ day arrears or definitional differences of what constitutes 90+ days (i.e. whether this is based on time or balance in arrears). [7]