Banks sitting on $500bn worth of ‘liar loans’

The Australian 12:00am September 12, 2017

Michael Roddan

UBS ARE THE LIARS – Bring It ON!!!!!  The demonization of Customers has begun!  Borrowers did not mislead the lenders.  The Banks used the computerised Tracker and Service Calculator to manipulate the data and keep secret from the duped customers.  Bring on the Royal Commission into Banks.  Consumers are fed up with corrupt APRA and ASIC conspiring to demonise the consumer victims.  We have the proof.

Australian banks are vastly underestimating the risks of a housing collapse, with the financial system sitting on $500 billion worth of “liar loans” sold to borrowers who gave lenders false information to get a mortgage.

The problem, evident in the latest mortgage survey carried out by investment bank UBS, could threaten the financial system as interest rates rise from record lows.

UBS found a third of borrowers were not “completely factual and accurate” on their home loan application in the past year. A quarter of all borrowers said they were “mostly” accurate, while almost 10 per cent said they wee only “partially factual” with their bank — a figure that has doubled in two years.

Mortgages sold through brokers, which now account for about half of all home loans, were found to be less factual than those sold through a bank.

UBS analyst Jonathan Mott said borrowers were also finding it easier to get a mortgage approved than in previous years.

“When asked about the amount of supporting documentation and verification required, participants stated there has been no increase,” he said.

“Given the rising level of misstatement over multiple years we estimate there are now around $500bn of factually inaccurate mortgages on the banks’ books.”

There are about $1.6 trillion worth of mortgages held by the Australian banking system, and although defaults and loan delinquencies are low, analysts believe rates of arrears are set to rise.

“Liar loans” came to prominence in the US during the global financial crisis, which was exacerbated by mortgages sold with inaccurate documentation.

With household debt levels at record highs, house prices continuing to climb, and with income growth at its slowest pact on record, Mr Mott said the survey of 907 Australians who took a mortgage in the past 12 months suggested borrowers were even “more stretched than the banks believe”.

“Both the probability of default and loss in the event of default for the Australian mortgage books continues to be underestimated,” he said.

“The impact on the broader economy from a housing downturn is likely to be more severe than the banks anticipate. Mortgage misrepresentation is systemic across Australia.”

Responsible lending standards legally require banks to ensure they are not selling loans to borrowers who are unable to afford them and have increasingly come under scrutiny from financial regulators amid surging house prices and exploding levels of debt.

Responding to warnings from the country’s biggest apartment builder, billionaire Harry Triguboff, that the impending burst of the apartment bubble would damage the economy, Shadow Treasurer Chris Bowen said he was concerned about stability amid “very high” rates of leverage and household debt, which he said had been encouraged by tax breaks for investors such as negative gearing.

Martin North, principle of Digital Finance Analytics, said borrowers escaping rising investor loan interest rates may have be deploying some “flexibility with the truth” when attempting to reclassify their loans as cheaper owner-occupied mortgages.

According to the Reserve Bank, there have been $56bn of “switching” between investor and owner-occupier classifications since investor rates were raised.

Mr North said rebuttals from lenders about loose lending standards was “more to do with protecting their positions than wanting to understand the truth — a core cultural problem across the sector”.

The UBS survey came just days after the chairman of the Australian Prudential Regulation Authority, Wayne Byres, warned he would be intensifying the regulator’s focus on lending practices over the next year, and would be targeting whether banks carried out accurate assessments of a borrower’s living expenses.

The UBS report said more borrowers were overstating their income or underplaying expenses. Around a third of borrowers said they misrepresented their living costs on loan applications — a sharp increase on the prior year’s result of less than a quarter. Most borrowers underplayed their expenses by just over 10 per cent, but some were understating living costs by 30 per cent.

The Australian Securities & Investments Commission recently took Westpac to court for allegedly breaching responsible lending laws when selling interest-only mortgages. Westpac denied the claims. ASIC has ramped up its surveillance of lending standards, examining whether banks took into account borrowers’ ability to pay loans at the end of the interest-only period.

“The findings of this survey and the fact that mortgage approvals remain at record levels implies that there is little evidence mortgage underwriting standards have been tightened through the eyes of the consumer,” Mr Mott said.

“We see these results as disturbing and difficult to reject given approximately one-third of participants stated their application was not entirely factual and accurate.

“If anything, we believe it is more likely these figures may understate the level of misrepresentation in mortgage applications as some respondents may not want to state they were less than completely accurate despite the anonymity of this survey.”

While the cash rate remains at a record low 1.5 per cent, RBA governor Philip Lowe last week said the economy was improving and foreshadowed that rate hikes could soon be on the agenda.

The UBS report came as the RBA released a discussion paper by economists John Simon and Tahlee Stone, who argued that although more Australians were locked out of the property market, those who gained a foothold were managing their finances well.

“Those who do step onto the property ladder are, on average, better placed to pay off their loans,” the economists said.