S&P also released its Australian RMBS Performance Watch for the December quarter and noted that arrears levels, over 30 days, in prime mortgage-backed securities transactions remained steady at 1.25 per cent, the lowest level seen in two years. Arrears for subprime RMBS increased however, by 0.08 per cent to 11.57 per cent over the period. S&P warns that with household debt-to-income ratios at very high levels and interest rates rising, arrears are expected to increase. Any weakness in the economy will only exacerbate this situation. Nevertheless, a significant increase in losses is not expected provided house prices avoid a correction.  Perhaps the most startling figures in the report relate to the rapid decline in RMBS outstandings. Outstandings of prime RMBS peaked at A$169 billion in June 2007 and by November 2009 had reached a low of just over A$95 billion - a decline of almost 45 per cent in less than 18 months. It is not surprising that there is now a resurgence in demand from investors.In an unrelated move, S&P increased the ratings on three classes of notes issued by Liberty Series 2006-2 Trust. The underlying assets of the Trust are non-conforming and subprime mortgages. Ratings on the Class B, C and D notes were raised to 'AA', 'A' and 'BB+' from 'A', 'BBB+' and 'BB', respectively. Amortisation of the underlying portfolio to less than 20 per cent of the original A$1.3 billion of mortgages means the notes are now adequately supported to withstand stresses that are commensurate with the higher rating levels.  S&P also noted that arrears on the portfolio have improved over the last year and have consistently remained below the industry average. Approximately, A$50 million of mortgages are in default but only A$4 million of losses have been incurred to date; all of which has been covered by excess spread. There is a A$16 million reserve to cover losses before charge-offs are made to the notes.