“Misrepresentation is systemic.”
UBS Securities Australia reported today that about 28% of Australian mortgages issued in 2015 and 2016 are what we in the US have come to call “liar loans,” which played a big role in the housing boom and the collapse and subsequent bailout of the global financial system.
The last phase of a housing bubble needs liar loans to keep going because buyers have to reach beyond their limits, and the only way to do this is lie now, or miss out forever on buying a house to live in or get rich with quick as investor.
Evidence that home buyers are lying about income, assets, expenses, and other things on their mortgage applications has been surfacing for a while, along with fears that this would eventually lead to a “Mortgage Meltdown.” The US-style mortgage fraud would be a “Nuclear Bomb” to Australia’s banks. Hedge funds are betting on this meltdown by shorting the big four banks.
But everyone else wants these bank stocks that dominate the Australian stock exchange to rise. They’re in everyone’s portfolio. And they’re all doing what they can to turn shorting the banks into a widow-maker trade.
To get “hard evidence,” UBS Securities Australia and UBS Evidence Lab surveyed 1,228 Australians who’d taken out a residential mortgage in 2015 or 2016. Participants, who remained anonymous, were asked 63 questions.
The survey was broad based, covering all states and territories in Australia. Given the size of the sample and broad spread of respondents we believe the results are representative of Australian mortgage borrowers. Conclusions based on the total sample have a potential sampling error of just ±2.71% at a 95% confidence level.
The resulting report, “Mortgages – Time for the Truth?” found that 28% of the respondents admitted that they’d lied on their mortgage application:
- 21% claimed their applications were “mostly factual and accurate.”
- 5% stated they were “partially factual and accurate”
- 2% “would rather not say.”
How many of these liar-loan applicants lied on the survey to hide their lies on the mortgage application? We don’t know. But the actual percentage of liar loans could even be higher, given the propensity of liar-loan applicants – just my hunch – to lie on surveys to cover their tracks.
And it gets worse: 32% of respondents who’d obtained a mortgage through a mortgage broker admitted they misrepresented some element of their application. That’s nearly a third!
More concerning, 41% of respondents who used a broker in 2016 and misrepresented elements of their application stated they did so based on their broker’s suggestion (vs 13% for bank channel equivalent).
That’s up from 24% in 2015! Brokers are getting more aggressive in pushing liar loans as the advancing housing bubble requires ever more finesse to be taken to the next level so that everyone can profit from it for as long as possible, before the whole construct collapses.
And this is how folks lied on their mortgage applications (multiple liars could check more than one box):
- 14% overstated household income (18% via brokers, 5% via banks)
- 13% exaggerated other assets
- 17% understated other financial liabilities
- 26% understated their costs of living
- 11% admitted to lying on “other”
- 31% “would rather not say”
- 12% admitted they lied on multiple factors.
There are more red flags: The survey found that many borrowers who lied on their applications were already struggling financially – that’s why they were lying on their application, to get the house they can’t afford, no? They were more likely to admit to these “risk behaviors”:
- Make only the minimum monthly payment on their credit cards
- Get cash advances on their credit cards
- Shuffle outstanding credit card balances between financial institutions.
And buying homes as an investment is surging. For 2015 vintage mortgages, 28% of the properties were for investment; for 2016 vintage mortgages, it jumped to 33%.
This surge in investment use is contrary to what the banks, Reserve Bank of Australia (RBA), and the financial regulator Australian Prudential Regulation Authority (APRA) had claimed. According to the report, it suggests that the banks, RBA, and APRA were relying on the borrowers’ declaration on the mortgage application that this would be for a residential property, when in fact it was just another lie.
The motivation for this particular lie: “The higher interest rate which has now been introduced on Investment Property compared to Owner Occupied mortgages.”
But near universal bullishness about house prices reigned: only 4% of the respondents expect them to fall over the next 12 months, under the motto that you can’t lose money in real estate:
- 45% expect house prices to rise up to 10%
- 13% expect house prices to rise more than 10%
- 31% expect house prices to remain the same
- 7% of people selected “Don’t know”
- Only 4% expect house prices to fall.
The report summarized (emphasis added):
Unfortunately survey results suggest misrepresentation is systemic with findings similar across the 2015 and 2016 Vintages, price to income levels, LVR [loan-to-value ratio], owner occupiers, and investors.
The results are “disturbing,” the report found, given that:
- The housing market is re-accelerating after the RBA cut rates twice this year
- The debt-to-disposable income ratio is 186% (among the highest in the world)
- Mortgages account for 62% of bank loans (up from 40% in the 1990s)
- Mortgage debt has soared from 15% of GDP in 1985 to nearly 100% in 2015.
This leaves the big four banks – Commonwealth Bank of Australia (CBA), Australia & New Zealand Banking Group (ANZ), Westpac Banking Corp (WBC), and National Australia Bank (NAB) – enormously exposed to even minor sniffles in the housing market.
And bailing them out is going to be tough: the combined assets of the Big Four amount to A$3.6 trillion, or 227% of Australia’s GDP!
The report refers to the RBS’s “subtle, but material, elevation of the importance of ‘financial stability’ in the operation of monetary policy.” Given that this liar-loan data “casts a statistically significant doubt over the accuracy of home loan applications, there could be some ground for more concerns over perceptions of financial stability, particularly in the event of a sharp fall in house prices.”
Everyone profits from liar loans: the banks, the brokers, governments at all levels because they get their cut, the sellers, stock market investors, bondholders, the construction industry, developers, pension funds even, and the buyers too, because it allows them to buy that house they can’t afford and get rich. Everyone benefits from housing bubbles, and no one wants them to burst.
Everyone benefits … except, well, those who can no longer afford to buy a home despite liar loans, and those who rent, and then of course the innocent bystanders that will get hit by the shrapnel when it all implodes while the beneficiaries of these bubbles get bailed out.
Vancouver probably outdid Sydney and Melbourne in terms of inflating a housing bubble. But it’s running into hard times. Read… Vancouver Housing Bubble Bursts, Hot Money Flees to Toronto