A recent survey conducted by Investment Bank UBS has led to fears that a mortgage meltdown could trigger an Australian Housing Crisis.
UBS have concluded that out of the 900 loans that were used in the survey, 67% were factually incorrect, therefore resulting in an estimated $500 billion in ‘liar loans’.
UBS then went on to state that “the level of liar loans meant the impact on the broader economy from a housing downturn was likely to be more severe than anticipated by the banks”. The most common inaccuracies were overstating income and understating living expenses, the survey found.
This risk was backed up by ASIC chairman Greg Medcraft, who said at a recent Australian Financial Review event that “observations in the UBS report were consistent with ASIC’s findings on responsible lending”.
“Thinking about the US subprime crisis, [the] big issues were basically the issue of overstatement of income, understatement of expenses and overstatement of property values.“
Mr Medcraft went on to suggest that the added risk of irresponsible lending setting off an Australian Housing Crisis is valid because of the mortgage broker remuneration model, which rewards brokers for securing larger loans for their clients.
“The mortgage commission is based on [the model] the larger their loans, the more you get. So logically what would you do? “It’s human behaviour. I’d do it,” he said.
Well it might reflect his behaviour, but it’s based on the assumption that:
- Mortgage brokers trick their clients into getting larger loans than required and falsify documentation to do so
- Lenders are stupid and don’t do stringent checks on the borrower
At Adviseable, our primary role is to buy investment properties for people who haven’t the time or inclination to do it themselves.
We don’t arrange finance for our clients or have any formal agreements with any loan providers, however we do feel compelled to raise a couple of points based on our observations of mortgage brokers:
- Their compliance obligations in checking loan application details are tougher than ever. They have to adhere to strict national credit code requirements and provide disclosure documentation to the client that verifies that the loan is not unsuitable for their needs
- The mortgage brokers we’ve had contact with tend to be more experienced, knowledgeable and qualified than internal bank lending staff
At the end of the day it will be the bank/lender who will approve or decline your loan after stringent checks. Even your living expenses are analysed via your transaction statements to substantiate personal expenses and regular spending habits.
At a higher level, the Australian Prudential Regulatory Authority (APRA) have been overseeing lending growth and conduct of banks closely since 2014, particularly investment lending.
Recent data suggests that their objectives are being met and lenders are complying with tough new measures to reduce borrower risk.
It could be concluded that the UBS ‘liar loans’ report suggests a prevalence of Lo-doc style lending in Australia, but this generally doesn’t exist here any more.
While details of the questions in their survey haven’t been released to date, we note that they were careful to use the term ‘factually incorrect’ rather than fraudulent when describing the loan applications surveyed.
Spreading fear is a common form of self-promotion, particularly in the property industry. We feel the release of this recent USB survey serves this purpose.
Don’t let all the scaremongering stop you from investing in your future.
Oh, and we don’t believe mortgage brokers will be responsible for an Australian housing crisis any time soon either.
