Local banks’ $500bn of ‘liar loans’ could threaten financial stability: UBS

One third of borrowers were not “completely factual and accurate” on their home loan applications, a UBS survey reveals.

 

Australian banks are sitting atop $500 billion worth of “liar loans” sold to borrowers who gave lenders false information to get a mortgage, which has the potential to threaten the entire financial system as interest rates rise from current record-lows.

The latest mortgage survey carried out by investment bank UBS found one-third of borrowers were not “completely factual and accurate” on their home loan application in the last year. One quarter of all borrowers said they were “mostly” accurate, while almost 10 per cent said they are only “partially factual” with their bank. Mortgages sold through brokers, which now account for around 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 ~$500bn of factually inaccurate mortgages on the banks’ books,” he said.

There are around $1.6 trillion worth of mortgages held by the Australian banking system, and although defaults and loan delinquencies are currently 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 that had been 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”.

“Losses in a downturn could be larger than the banks anticipate,” he said.

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

Chairman of the Australian Prudential Regulation Authority Wayne Byres warned on Friday he would be intensifying the regulator’s focus on lending practices over the next year, and would be investigating banks to see if they were irresponsibly overriding their lending policies.

APRA will be targeting whether banks carried out accurate assessment of a borrower’s income and expenses; whether banks had watertight processes to check credit history and obligations; and effective oversight to ensure lending practices meet standards.

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

“Despite recent macroprudential policies, 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,” he said.

“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 official cash rate remains at a record low 1.5 per cent, Reserve Bank governor Philip Lowe last week warned that the economy was improving, foreshadowing that rate hikes could soon be on the agenda. Financial markets are pricing in around an 85 per cent chance of a rate rise by the end of next year.