Ratings agency S&P has placed a negative credit watch on 65 different classes of residential mortgage-backed securities (RMBS), following its decision to lower its ratings on two local lenders’ mortgage insurance (LMI) heavyweights.

Genworth Australia and QBE Lenders’ Mortgage Insurance both had their ratings lowered to A with a stable outlook last month, after S&P applied new assessment criteria at the start of July. An A rated LMI provider has a higher minimum credit support requirement than A+.

The downgrades of Genworth and QBE’s LMI ratings reflect a weakened competitive position locally and a lack of business diversity, S&P reported.

Genworth Australia's earnings and market share have decreased amid structural declines in lenders’ mortgage insurance over the past five years, driven by a lower appetite for high loan-to-value ratio bank loans, restrictions on mortgage broker commissions and more onerous loan servicing assessment.

“We expect increased competition from bank LMI captives and a new entrant to place pressure on Genworth's market position and earnings,” S&P says.

S&P assumes Genworth will remain the largest LMI in Australia and that its profitability will stabilise at around current levels over the next one to two years.