US-Style Mortgage Fraud a ‘Nuclear Bomb’ to Australian Banks

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Regulators close eyes, hope Housing Bubble doesn’t collapse.

By Lindsay David, Australia, founder of LF Economics:

The Australian Securities & Investments Commission (ASIC), which regulates financial services companies,has the backbone of a chicken wing when it comes to enforcing the rule of law; this is widely recognized in Australia and resulted in a Parliamentary inquiry. If any politician believes that ASIC is a “tough cop on the beat,” they should seriously reconsider their opinion on this issue.

Under the pomp and ceremony of the government’s decision to levy the banks to fund ASIC’s prolonged $400 million+ annual fishing vacation is its pursuit of catching tadpoles in the open seas while leaving sharks and barracudas to freely roam. Unfortunately for the regulator, there is a new term Australians will become accustomed to.

Control fraud. It refers to fraud committed by the high-ranking employees of a corporation: executives and managers, typically a bank. It’s a crime that ASIC has decided neither to investigate nor prosecute, leaving borrowers on their own with no pennies to spare and nowhere to turn to.

So here’s how a control fraud would work. Let’s say you’re an asset-rich and income-poor (ARIP) husband-and-wife in their 70s surviving off an income of less than $23,000 a year and own your $400,000 (today’s value) home outright. You want to obtain a $400,000 loan from the bank for an investment property that will run at an annual net loss. You walk into the bank branch for an appointment and are presented with 3-page pre-filled loan application form (LAF) stating only the basics details.

During the application process, you honestly state your income and assets. You are then issued with a 30-year interest-only loan you have absolutely no chance of servicing beyond a three to five year horizon. In other words, there is a strong chance that a few years later, the only way you can get out of your loan is to sell your investment property at a higher net price than what you paid for it to extinguish your mortgage — or go bankrupt.

Firstly, this type of loan is predatory as it is far larger than what can be serviced by income and rent. There are laws and regulations in place preventing banks from engaging in this illegal activity which ASIC (including APRA) seemingly refuse to enforce, let alone impose penalties on such behavior.

Secondly, and more importantly (from a criminal aspect), there are many cases where bankrupted borrowers realize they were not given a copy of their LAF at time of approval. They then phone the lender and demand their copy. The banks’ version differs significantly from the original application.

On these LAFs, there is clear evidence of lenders tampering with their copy to show that a particular borrower was more credit-worthy then they actually were. In a nutshell, there is evidence of lenders inflating incomes and assets of borrowers to get mortgages approved. In many cases, signatures and initials of borrowers were forged; this is fraud.

So when the old ARIP couple goes to ASIC after they ascertain the bank’s copy of the LAF (which now states they apparently earn $180,000 a year rather than $23,000) to report fraudulent activity and rightly asking for justice to be served, ASIC has an all too familiar response. Now broke, ASIC will inform you in a polite manner: “Hire a lawyer as it is not ASIC’s problem.”

In reality, this conduct is why ASIC was established, to protect Australians against white collar crime and enforce the law when it is broken.

If you think this is a one-off instance, then how has Denise Brailey, Australia’s leading financial services consumer activist, managed to organize with more than two thousand victims of this mortgage control fraud along with their LAFs to prove they are victims of fraud?

Yet, all of these accusations have been completely ignored by ASIC and other authorities when the evidence points to widespread control fraud.

So why would a lender fudge their copy of a LAF to issue predatory jumbo loans? The answer is simple: it maximizes revenues, share prices, profits, market share, and executive remuneration.

Furthermore, it keeps funding costs low via AAA ratings the ratings agencies provide. By using the fraudulent LAFs, the residential mortgage backed securities (RMBS) can be made to look secure. In reality, however, there is evidence to suggest these AAA-rated RMBS contain lots of toxic subprime mortgages.

We have seen this story before in the US. The only way to run up mortgage debt as historically and globally high as Australia’s is for lenders to commit control fraud. According to Brailey, this has been going on since the late 1990s. ASIC could’ve intervened to stop these practices a long time ago but have decided instead to side with the fraudsters.

A Royal Commission into lenders would uncover a cesspit of control fraud, which is why vested interests adamantly oppose it. Typically it takes a bursting asset bubble for the fraud to be publicly revealed, but Australian banks are so fraudulent the criminality is seeping out everywhere before the asset bubble has even imploded.

These control frauds have received wide publicity in the media, though the one to watch is the mortgage control fraud which is likely to be the nuclear bomb to our over-leveraged and under-capitalized banking system.

In the meantime, if you are currently seeking a loan, do not walk out without your full eleven-page copy of your LAF from the bank or broker, and do not sign anything without first obtaining legal and financial advice. And never sign blank forms! By Lindsay David, founder of LF Economics

A visit to Sydney by Jonathan Tepper has caused much wailing and gnashing of teeth amongst vested interests in the real estate market. He thinks Australian housing is in a massive bubble and sees big price declines. And the vested interests were out for blood. Read…  The Delusional Australian Housing Bubble

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  18 comments for “US-Style Mortgage Fraud a ‘Nuclear Bomb’ to Australian Banks

  1. hidflect
    April 25, 2016 at 5:03 pm

    I had a friend who was “walked over the line” by a mortgage broker so he could qualify for a house. They didn’t lie about his income but they just omitted to note his employment was on a yearly renewable contract basis. He was let go at the end of the contract but luckily could scramble to a new job thanks to being an excellent employee.

  2. Michael Gorback
    April 25, 2016 at 5:21 pm

    I guess there’s going to be a movie sequel called “The Big Down Undershorts”

  3. walter map
    April 25, 2016 at 5:24 pm

    I still think it was a bad idea to legalise fraud, but the Financial Industrial Complex insisted.

  4. interesting
    April 25, 2016 at 5:24 pm

    Now broke, ASIC will inform you in a polite manner: “Hire a lawyer as it is not ASIC’s problem.”

    they are in on it, fraud pays and it pays very well.

  5. Michael Francis
    April 25, 2016 at 5:32 pm

    ASIC are totally useless.

    All what they (ASIC) are good at is asking Australian small family run businesses at the end of each year to fill out a form confirming that their address details haven’t changed and they are not criminals.

    If you are a day late lodging this form complete with a $220 lodgement cheque to ASIC then they fine you hundreds of more dollars.

  6. Brett
    April 25, 2016 at 11:26 pm

    If AISC can’t get it up anymore we really are stuffed down under.

  7. d
    April 26, 2016 at 5:01 am

    This fraud is committed by the non bank brokers to which the banks will claim Ignorance.

    Turnbill is not touching the negative gearing deduction for a reason.

    The issue outlined is a big part of the reason.

    If the housing market falls over, Banks and the taxpayer wont loose anything. As although these loans are dodgy they have asset backing to zero them.

    The is 800 K worth of property’s with a 400 K loan. loan is recourse to either or both property’s and borrower assets.

    Bank sells both property’s for 200 K each and walks away, Smiling.

    Whilst children, now have no inheritance, and become rent slaves for life.

    Many Australians are Born with chain-marks around their ankles, the above is just they way they do things

  8. nhz
    April 26, 2016 at 7:28 am

    “You are then issued with a 30-year interest-only loan you have absolutely no chance of servicing beyond a three to five year horizon. ”

    How is this possible with rates the lowest in centuries? Is Oz so different from Europe? EU mortgage rate for 10-20 year fixed is now in the 2-2.5% range, so a $400.000 property would require $8000-10.000 yearly payments. That’s a lot with $23.000 income, but in my country many people have to spend more than 50% of their income on rent (not on the mortgage of course, thanks to the current ridiculously low rates).

    And nobody over here cares what the property is worth after 30 years, and the borrower doesn’t care either (they probably won’t live till they are 100+). Central banks will paper over the losses, won’t they?

    If these people are ‘asset-rich’, why are they buying the home anyway, as an investment property? In that case they can rent it out and there is no problem for many years servicing the loan (of course there is trouble brewing down the line due to elevated valuation, but nobody worries about that anymore because home prices always go up thanks to the central banks …).

    I remember from a UK documentary some years ago that in some parts of London over 90% of home buyers either overstated their income (like a cleaning lady stating she earns 150.000 pounds a year) or didn’t state anything and let the RE agent take care of it. For a small extra fee, they even threw in fake identity for the mortgage, who cares – it’s all free money and everybody does it. Most of these people knew they were committing fraud, but by now many of them have made a fortune; if you can service the loan in the first 1-2 years, the value of the home has increased so much already that there is very little risk for the new homeowner, unless there is a severe crash (and by now every homeowner assumes that politicians won’t let that happen ever again, all idiots are entitled to be bailed out).

    I don’t doubt there is a lot of fraud from the RE agents and lenders, but I don’t doubt either that most of these new ‘homeowners’ are not simply ‘victims’ but just as guilty, in order to buy a bigger home than they can really afford.

    • Lee
      April 28, 2016 at 3:47 pm

      Variable rate mortgages here are in the 5 – 6% range at most banks.

      As I have posted before the banks here find any excuse to rip off customers and this is just another example.

      Banks are now earning about 2% more margin on ARM’s than before the GFC.

      That means on a A$300,000 loan they are making A$6000 a year more than before the GFC. Multiply that by the huge number of ARM’s outstanding and you’ll understand why the banks’ share prices have soared over the past 8 years or so.

      The next central bank meeting here is on 2 May and there is now an expectation of an interest rate cut. Just watch and you’ll see the banks try and hold back some of the cut because of ‘increased costs’ (Which means they made bad loans to companies.)

      In the USA the government and other entities rip you off. Here in Oz its is primarily the banks.


      Simple: because they can.

      And don’t get me started on the share market here in Oz either: a blatant con game run by the vested interests to legally steal money from everyone but the insiders.

      As far as the RE market is concerned the banks and the government here are trying their best to wreck it. Increased costs for foreign buyers and restrictions on loans for foreign buyers from the big banks.

      As long as the population increases and foreign buyers keep coming then the market will do ok.

      Once the government gets its dirty grubby little paws in the mix then it can affect the number of foreign buyers and cause trouble.

      • d
        April 29, 2016 at 12:24 am

        Australias biggest problem is not its banks, but its corrupt unions, working with corrupt leftist politicians like Juliar Gillard.

        Most of the ticket clipping operations in Aus, were put together by the leftist administrations, and their unions.

        It is very hard to do anything in Australia, unless they get, a BIG PIECE.

        Just look at the amounts of taxes and fees, the councils and state get out of every new house start, or existing house transaction, stamp duty even on boat sales.

        Banks are not the problem, they are simply playing by leftist extortionist state and union rules.

  9. Keith
    April 26, 2016 at 8:45 am

    Join the party, destroying your economy with a real estate boom is compulsory.

    The timeline for the collapsing global economy.

    Japanese banks had been on a maniacal lending spree into real estate and the bubble popped in 1989. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

    Japan then had the rest of the world to trade with that was still doing well but it never really recovered.

    US banks went on a maniacal lending spree into real estate and the bubble popped in 2008. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

    US banks used complex financial instruments to spread this problem throughout the West.

    Rather than own up to losses and admit their bankers were fools, the UK and Euro-zone covered up the problems with loose monetary policy.

    Japan, the UK, the US and the Euro-zone had the BRICS nations to trade with that were still doing well but they never really recovered.

    The BRICS nations are now heading for/in recession.

    Doesn’t look good does it.

    Australian and Canada come on in, the water’s fine.

  10. Paulo
    April 26, 2016 at 12:21 pm

    Perhaps this is an old fashioned attitude, and I accept these lending practices are criminal, nevertheless, if a couple as described lose their options and investments they have only themselves to blame for being greedy.

    If something appears to be too good to be true, perhaps it is. It isn’t easy making a profit on anything in a world run by sharks.

  11. Diogenes
    April 27, 2016 at 1:41 am

    ASIC is the company regulator.

    APRA regulates deposit taking banks, financial services and insurance and superannuation.

    Accuracy is important.

  12. chaos
    April 27, 2016 at 2:47 am

    Thankfully I live in New Zealand stupid Aussies with their housing bubble come over here mate I’ll show you what a real economy is built on.

    Our banker prime minister knows how to run an economy, we can even do it without an income.

    • d
      April 27, 2016 at 7:58 am

      Bit of accuracy would go well.

      Johnny was formally a “Forex Trader”, a relatively successful one..

  13. Terry
    April 27, 2016 at 5:04 am

    To NHZ. Some Facts.
    In Aus the interest rate may be 2.25% or whatever.
    Our banks then plus up (Margin to lenders) of up to 3%.
    This bank margin is at an historic high.
    And the banks word to the government is do not mess with us.
    Banks agree to pay $120 million to fund APPRA’s increased policing requirements. But no ROYAL COMMISSION. Get the picture.
    After all they are an oligopoly. So the borrower pays up to 6 to 8% depending on your negotiating skills.
    Now the Aussie economy is heavily based on real estate. Forget mining, commodities and agriculture. They (Real Estate) have one powerful lobby group.
    So what do we do when the real estate market looks like turning down.
    Entice foreign buyers. Mainly Chinese. This will also pass. But the pain will be born by us, the average citizen.
    Bottom line. Our kids cannot afford the dream of home ownership.
    The system has failed and by our own hands. The solution. Big change bought on by crisis. There is no politician, now or on the horizon that can lead us through this. The system forbids it.
    In Aus I pray it will be orderly and peaceful. You will go before us.
    Best of luck. A mate from down under.

    • nhz
      April 29, 2016 at 12:52 pm

      thanks for the info, interesting.

      It sounds a bit like the situation in Netherlands (and most of Europe) a few years ago. Since then the banks have lowered mortgage rates considerably under pressure from politics and homeowner organizations (!). I think they decided that it is best for them to keep the housing bubble going and (relatively) high mortgage rates won’t help with that. Of course there are other sides to this story, e.g. a few years ago savers still got some interest on their savings accounts, the banks live from the spread between savings and mortgage + other loans. But now that mortgage rates are down to almost nothing, it’s the savers who pay the bill by getting far lass interest that the tax office charges them for assumed profits on their savings account (of course, it’s never the banks who will pay …).

      The Dutch economy is heavily leaning on finance (paper shuffling) and the housing bubble, it has been for 25-30 years. Enticing foreigners probably won’t help here, the big Dutch bubbletrick is the most generous mortgage tax deduction in the world and a unique free housing put option from the government (guaranteed by the tax payers). If you have significant income, the tax office pays most of the mortgage but this doesn’t apply to foreign buyers. The home price guarantee (you can never lose money when you have to sell your home) also doesn’t apply to foreigners, although politicians might try to change this.

      Just like in Oz, many kids (and even many Gen-X citizens) cannot afford a home unless they take huge risks and assume that the current government policy will continue forever (if not they will be toast, financially). But if you have more that minimum income, rents are outrageously high so some people take the gamble anyway.
      The Netherlands has a history of housing bubbles and busts that stretches for four centuries. Over time the price-to-income ratio has varied wildly by a factor of more than 4x, but it always stayed in the same band. The current ratio is above the highest level in the 400 years (excepting 2007/2008). But buyers feel lucky ;-)

  14. J P Frogbottom
    April 27, 2016 at 3:44 pm

    The U.S. has seen this movie before – TWICE in fact. Once, the raw version was the S&L crisis of the 80’s that cost Tax Payers a lot. At least we prosecuted and convicted numerous bankers then.

    Reprised with the Greenspan housing bubble aided by Wall St. greed and more “Control Frauds” we gave you 2008. Now, with but a single female banker prosecuted, the “recipe” was successfully exported to Australia, perhaps Canada, and undoubtedly re-imported back to the US slightly modified to perhaps, include stocks and debt instruments.

    We just love FRAUD, it is how the ‘new and improved’ system works.

    What kind of a loan did you say you’re looking at?

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