This article is from the Australian Property Journal archive
AUSTRALIAN banks are sitting on as much $500 billion worth of “liar loans” and they are underestimating the probability of defaults and losses in the event of a housing downturn, according to UBS.
Borrowing from a term borne from US subprime mortgage crisis, UBS’ analysts Jonathan Mott, Rachel Bentzvelen and George Tharenou conducted a survey of 907 mortgage applications issued over the last 12 months and found 33% contained inaccurate financial information, up from 23% in 2016.
UBS found as much as $500 billion of the $1.7 trillion of mortgage debt outstanding was issued based on fraudulent information.
The most common lie was overstating income and assets, whilst at the same time understating living expenses, other loans and liabilities. The report found on average applications understated their expenses and liabilities by 10-12%, although some were as high as 30%.
UBS observed that 11% of applications contained “partially” factual and accurate information, up from 4% two years ago.
UBS also found a higher level of inaccurate data were originated by mortgage brokers, representing 39% of applications and even more concerning, 37% of applicants who applied via a broker said it was the broker’s suggestion.
The report found 67% contained factual and accurate information, down from 72% in 2016.
ANZ Bank was the worst affected with 45% of loans issued categorised as “liar loans”, significantly above the industry average of 33%.
The report found 33% of New South Wales and ACT applicants lied followed by 31% of Victorians, Western Australians and Tasmanians.
In contrast the most honest states were South Australia, Queensland and Northern Territory, where 25% lied on their applications.
Meanwhile UBS said there was little evidence that Australian Prudential Regulation Authority’s measures were working and they warned that the probability of home loan defaults and potential losses was being “underestimated”.
They warned that the impact of a downturn would be more severe than expected.
“While household debt levels, elevated house prices and subdued income growth are well known, these finding suggest mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate.
The broker said it was “underweight” Australian banks and cautious of the outlook.
“Overall, we believe the accelerating level of mortgage misstatement by Australian borrowers is a substantial problem and more needs to be done by the banks to address it,”
“The impact on the broader economy from a housing downturn is likely to be more severe than the banks currently anticipate,” they said.
UBS’ report comes two months after APRA ordered the major banks to raise extra capital to mitigate risks in residential mortgages.
APRA required all banks raise the equivalent of around 150 basis points.
According to Morgan Stanley analyst Richard Wiles, every 50 basis point above 10% equates to nearly $2.2 billion in additional capital. Two years ago, the first measure saw the four banks raise additional $20 billion.
Meanwhile a report by Fitch Ratings last month found mortgage arrears increased in the 1Q17 despite an improved economic environment and historically low interest rates.
Fitch’s Dinkum RMBS Index recorded a mortgage arrears increased by 12bp to 1.21% as at 1Q17.
Australian Property Journal
