Banks ordered to review mortgage fraud

Major banks have been ordered to review fraud systems amid concerns of systemic mortgage misselling.

Wayne Byres said tightening lending standards had contributed to the slowdown in housing credit growth, but labelled this a “good thing”.

The banking regulator has ordered the major banks to have their fraud systems externally reviewed, amid concerns mortgages are being sold on inflated incomes and generous living expense assumptions.

Appearing before the Senate Economics Legislation Committee, Australian Prudential Regulation Authority chairman Wayne Byres revealed the regulator had informed the “largest institutions” to get their external auditors to review fraud control mechanisms to ensure they are working.

A survey from UBS this month flagged that 28 per cent of mortgage customers stated their application was not factually accurate, with a higher proportion of misrepresentation among those who used a broker than went through bank channels.

Asked today if banks approving inaccurate loans may be systemic or in isolated cases, Mr Byres said APRA was taking the issue “seriously” and had homed in on verification processes, such as evidence of income, as part of broader efforts to strengthen lenders’ serviceability assessments.

“We have told the larger institutions that we’ll be asking them to have their external auditors do a review of what are essentially fraud control mechanisms to ensure that there are mechanisms in place and…are working,” he added.

According to UBS’s survey this month of 1228 people who recently took out a mortgage, 344 misrepresented parts of their application, with 26 per cent undercooking living costs and 14 per cent over-stating income.

More than a third of people who used a broker this year and misrepresented their application claimed they did so based on their broker’s suggestion, compared to 13 per cent through bank channels such as branches.

“Unfortunately survey results suggest misrepresentation is systemic with findings similar across the 2015 and 2016 (loan) vintages, price to income levels, loan to valuation ratios, owner occupiers and investors,” said UBS analyst Jonathan Mott.

“We believe these results are disturbing given: the recent housing market reacceleration;

elevated household leverage (186 per cent debt to income); and mortgages accounting for

62 per cent of bank loans.”

The survey builds on concerns about lending standards, amplified in February when US research house Variant Perception claimed Australia had “one of the biggest housing bubbles in history” fuelled by “very poor” bank underwriting standards plus fraudulent behaviour by mortgage brokers.

Brokers and banks have rejected the claims, and JPMorgan analyst Scott Manning this week dismissed that similar fraud was occurring as in the US prior to the subprime mortgage meltdown.

Referring to bubble fears, Mr Byres said he was reluctant to use the “b word” because the issue was “far more nuanced”. But he conceded there was “heightened risk” and APRA was trying to embed improved lending standards into standard industry practices.

“Prices are very high, household debt is very high and income growth is relatively subdued, so it’s an environment in which a fair bit of caution is needed,” he said.

While noting risks in the apartment market, Mr Byres said APRA’s improvement of bank lending standards in recent years had reduced the potential problems and there were efforts being made to discern the major lenders to developers, to ensure there was not “excessive exuberance”.

In December 2014, APRA told banks to limit lending growth to property investors to 10 per cent a year and ensure borrowers could repay under interest rates of 7 per cent. The regulator has also pressured banks to curb lending to foreigners, met with bank boards, conducted “mystery shopper” tests on lenders and adjusted capital requirements.

Mr Byres said tightening lending standards had contributed to the slowdown in housing credit growth, but labelled this a “good thing” as some segments -- such as investor borrowing -- had been too hot and intense competition was inspiring poor decisions.

“We think we have improved lending standards, that has had the effect probably of meaning that there are a few less housing loans being given, particularly to marginal borrowers and we think that’s on balance a good thing for the system,” he said.

In a report released today, Morgan Stanley strategist Daniel Blake said the “APRA-induced rationing of credit availability should help to manage this future oversupply” of apartments as construction cools, reducing the odds of broader pain across the economy.

The investment bank, however, forecast a looming “credit crunch” for the apartment market amid rising settlement failures and housing oversupply hitting 100,000 by 2018. The Reserve Bank this month also warned risks in some apartment markets, particularly inner-city Brisbane and Melbourne, were “closer to materialising” as oversupply resulted in settlement failures and price declines.

Moody’s this week warned mortgages more than 30 days in arrears have risen to the highest level in three years, while official monthly jobs data released yesterday also showed the loss of 53,000 full time jobs in September – the biggest monthly fall in five-and-a-half years.