Banks hold $500bn of ‘liar loans’ on their books

  • By Elizabeth Fry

One third of borrowers have lied on their mortgage applications, underscoring the banks’ poor lending standards and raising fears of “systemic” misrepresentation across the property market, UBS has warned in a new report.

Worse, the investment banker said this equates to a shocking $500 billion of ‘liar loans’ on the books of the Aussie banks.

Speaking on the latest UBS mortgage survey, analyst Jonathan Mott called the findings "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," he said.

In the survey of 907 Australians who have taken a mortgage over the last 12 months, UBS found that only 67 per cent of respondents stated their mortgage application was "completely factual and accurate" in 2017 - a statistically significant drop from the 72 per cent recorded the previous year. 

Borrowers stretched

The analyst further claimed the banks’ mortgage books are worse than believed.

With household debt levels at record highs, climbing house prices and subdued income growth, Mott said the survey indicated that borrowers were even “more stretched than the banks believe implying losses in a downturn could be larger than the banks anticipate”.

“As a result, we believe both the probability of default and loss in the event of default for the Australian mortgage books continues to be underestimated," he said.

Despite recent macro-prudential policies, Mott said the findings - together with the fact that mortgage approvals remain at record levels - implies that there is little evidence underwriting standards have been tightened from a customer's perspective.

While banks have tightened underwriting following APRA’s sound lending guidance, it does not appear to Mott to have prevented applicants "stretching the truth" especially when dealing with brokers.

Brokers implicated

Mott asigned much of the blame for ‘liar loans’ to mortgage brokers after the survey found a significantly higher level of lies when home loans were sought through brokers than through bank branches.

As many as 32 per cent of respondents who secured a mortgage via a broker claimed they falsified some part of their application, compared to 22 per cent who got a mortgage through a bank. 

Even more worrying, 41 per cent of respondents who used a broker in 2016 and lied about their income or expenses on their application reckoned they did so based on their broker’s suggestion. For the banks, this number was 13 per cent.

“Overall, we believe the accelerating level of mortgage mis-statement by Australian borrowers is a substantial problem and more needs to be done by the banks to address it," said the analyst.

At an individual lender level, ANZ's level of application factual accuracy at 55 per cent was significantly lower than the industry's 67 per cent for 2017.

National Australia Bank and the Commonwealth Bank both saw a deterioration in completely factual and accurate mortgage applications but were in line with the industry.