Australia’s leading expert in mortgage fraud BY BANKS, Denise Brailey of the Banking and Finance Consumers Support Association (BFCSA), gave the following presentation to the CEC’s 30 June seminar in Perth. Denise exposes the mechanics of the massive mortgage fraud perpetrated by Australia’s banks, with the complicity of the regulator APRA, to pump up one of the biggest housing and debt bubbles in the world. This is the same fraud that fuelled the US sub-prime bubble which triggered the global financial crisis 10 years ago this month, and will likewise crash Australia’s banks and economy when the bubble bursts here. Denise digs deep into the scandal that the royal commission was only able to briefly touch on, due to its restricted terms of reference and time.
Citizens Electoral Council of Australia
Royal Commission spotlights the mortgage fraud that could implode the banking system
In its first fortnight of hearings, the Banking Royal Commission drew the nation’s attention to the huge problem of mortgage fraud. The hearings showed that each of the big four banks, which together control 80 per cent of banking in Australia, have engaged in fraud on a massive scale. The fraud is not confined to the margins of the home loan business, but infects the majority of mortgages, which means most borrowers can’t afford their loans. The bottom line is there is nothing real propping up the Australian housing market—it is a bubble of lies, and it would only take a slight shock to burst the bubble and bring down the entire banking system.
Until now, a small number of individuals and organisations, including the Citizens Electoral Council, have been warning of this danger. The Royal Commission has forced everyone to look at it. A shocked Robert Gottliebsen fretted in the 21 March Australian Business Review that the extent of the fraud means the Reserve Bank shouldn’t raise interest rates. “Reserve Bank Governor Philip Lowe must [be] becoming increasingly concerned at the revelations at the banking royal commission”, Gottliebsen wrote. “Lowe now knows that some if not all the banks have let their credit standards slip…. The false income statements on bank loan applications are contributing to widespread mortgage stress because incomes have not been rising. If Lowe increased interest rates it would cause a lot of people to throw in the towel and sell up and if that resulted in a setback to the housing market the loan dominoes falling would cause considerable bank losses.”
Analysts at giant investment bank UBS went further, warning that a possible consequence of the Royal Commission exposing the fraud could be a credit crunch—like the total breakdown in bank lending that happened in the 2008 global financial crisis. UBS analyst George Tharenou told ABC News reporter Stephen Letts on 24 March: “In this scenario there is a risk of a pick-up in arrears as existing borrowers become financially stressed, and could precipitate a broad-based credit event.”
Mortgage fraud worse than reported
Mortgage fraud is a crisis, even worse than revealed in the Royal Commission. The most authoritative analysis comes from Denise Brailey of the Banking and Finance Consumers Support Association (BFCSA), who estimates that 80 per cent of all mortgages are “sub-prime” interest-only loans, of which 70 per cent of borrowers don’t know they are interest-only.
Mrs Brailey is one of Australia’s leading experts on bank fraud. A trained criminologist, for decades she has advocated on behalf of thousands of bank victims to save their homes. She has also testified before numerous Parliamentary inquiries.
The BFCSA has made a submission to the Royal Commission, which reveals how the fraud is perpetrated. The information comes from the thousands of cases Denise Brailey has worked through personally, and her interviews with countless victims and mortgage brokers. She explained the key elements of the fraud in a two-part interview with The CEC Report on 22 March. (Click here to view Part 1.)
The BFCSA submission exposes:
- The mortgage fraud is driven by the banks, not brokers. The banks employ Business Development Managers to give brokers 30 hours of minimal training, which includes encouraging the brokers to practice on their families—this has led to many brokers’ family members also losing their homes due to unaffordable loans.
- The components of the “black box” of the fraud machine include the (usually) 11-page Loan Application Form, of which the borrowers only see three pages, while the balance is filled out according to banks’ specifications; and the “serviceability calculator”, which the banks control and brokers can only access with a password, and which ignores actual living expenses in favour of the Henderson Poverty Index that assumes all borrowers live on bread and water.
- The unaffordability of loans is hidden for the first 3-5 years by various buffer loans, including credit cards with large limits and personal overdrafts, which the borrowers use to make their initial repayments. On average, the borrower’s debt increases by $150,000 in the first five years. The need for buffers proves the loans are unaffordable. When the buffers run out, banks avert defaults by refinancing the loans.
- The banks securitise these dodgy loans, and on-sell them to investors as Residential Mortgage Backed Securities (RMBS). It is the payment stream that is securitised, but the investors wouldn’t know that the payments are not coming from the incomes of the borrowers, but from extra credit from the banks—a huge Ponzi scheme at the heart of Australia’s financial system.
Prepare for a crash
The shocking level of fraud in mortgage lending is a huge, immediate threat to Australia’s banks and economy. The dramatic rise in house prices since 2000 has completely distorted the Australian economy, such that financial services (dominated by mortgage lending), real estate and construction are Australia’s three largest economic sectors, and collectively account for more than a quarter of all economic activity. The government must face the reality, informed by the Royal Commission and the BFCSA, that mortgage fraud, and not real demand, has fuelled the extraordinary expansion of these sectors, which means it’s a house of cards that could come crashing down from just a small interest rate rise, or any other event that drives up the cost of living for mortgage-stressed borrowers. A rise in defaults will crash the housing market, destroy the jobs of hundreds of thousands of construction workers, bankrupt the big banks which have made mortgages more than 60 per cent of their business, and plunge Australia into economic chaos.
The CEC calls on the government to take two actions in response to the mortgage fraud and the economic threat it has created:
- Expand the powers and duration of the Royal Commission, so it can investigate every aspect of the criminal fraud in the system, especially the complicity of the regulators APRA and ASIC, without hindrance, and hear testimony from real experts such as Denise Brailey;
- Implement a structural, “Glass-Steagall” separation of the banking system, which will be a firewall to protect the real economy from a banking crash, and will stop banks from the gambling in mortgage backed securities and other derivatives that has been integral to their mortgage control fraud.
Mortgage fraud is the dirty secret that could spark a financial meltdown, economist warns
YOU DON’T need a “good job” to get a mortgage if your loan documents boost your salary by $288,000. But the consequences are frightening.
MORTGAGE fraud by brokers and banks could bring on a financial meltdown, an economic researcher has warned.
As at least three of the major banks investigate allegedly dodgy loans to Chinese buyers, LF Economics founder Lindsay David says fraudulent lending is rife in Australia’s property market — and that we should all be scared.
NAB is the latest bank to launch an investigation after receiving a tip-off about a mortgage broker involved in a new tower development in Melbourne’s Southbank.
It comes as lenders instruct brokers to stop lending to overseas borrowers, after Westpac and ANZ launched an investigation into suspect loans worth almost $1 billion.
But Mr David believes the practice of doctoring paperwork on home loans is much broader than the banks would have us think.
NAB has been told a broker used Photoshop to inflate figures on pay slips and bank statements in order to secure loans for overseas buyers.
“We are investigating these claims and will refer them to authorities if and when appropriate,” a spokeswoman for the bank told news.com.au.
It is understood that Westpac has also been contacted about the mortgage broker, but the bank declined to say whether any investigation had been launched when contacted by news.com.au.
While the practice has long been portrayed as the work of a few bad apples in the competitive mortgage broking industry, evidence is emerging that senior banking employees themselves may be involved in mortgage fraud.
Last month, ABC business journalist Elysse Morgan revealed that her loan documents had been tampered with, telling Four Corners that she got them back from the bank to find that her income had been “massively inflated”.
“There was a line that says ‘your monthly income’, and for my husband it was correct, but for me it was inflated by around 38 per cent,” Ms Morgan said.
She said she had never found out who changed the figures on her loan application, and declined to name the bank when contacted by news.com.au.
It may sound extraordinary, but Ms Morgan is not alone. Hundreds of mum-and-dad borrowers have contacted the Banking and Finance Consumers Support Association with claims that lenders have forged their signatures on loan documents, with details of their personal income and assets bumped up by hundreds of thousands of dollars.
BFCSA President Denise Brailey says she has reported hundreds of such cases to the financial services regulator, ASIC.
Borrowers come to her for advice when they find themselves saddled with massive debts and their homes repossessed, after being sold loans that are beyond their ability to pay.
WHY IT MATTERS
When Ms Morgan saw that her income had been inflated, even though she was “on a pretty good salary”, she wondered: “What’s in the interest of the organisation or the institution to prop that up?”
“You’ve only got to think to yourself, ‘are they taking it from a double-A to a triple-A rating?” she said.
That’s exactly what Mr David believes is going on, and he warns of an impending disaster on the scale of the collapse of the United States housing bubble that sparked the global financial crisis of 2007-8.
If the banks are massaging the numbers on people’s loans to make them look more creditworthy, this would allow them to secure credit more cheaply from the institutions that lend to them.
The Australian economy relies on credit from these overseas sources to function, and the integrity of the banking system, including loanbook serviceability, is critical to the ongoing supply of capital that keeps the nation running.
Mr David believes Australia’s lending market is littered with “junk loans”, arguing that there is no way the banks’ fast-growing loan books could be entirely made up of serviceable debt.
“We think we’re just scratching the surface on this,” he said. “It’s the biggest problem facing the economy.”
Even a relatively small downturn, or a housing market collapse, could bring the whole system crashing down, he said.
“It’s quite easy to sell off your asset when it’s appreciating in value, even if you can’t pay the loan,” Mr David said.
“But when the reverse happens and you overbank what your house eventually becomes worth, that’s when real problems begin.”
He argued that Australia’s spiralling household debt — now worth more than $2 trillion, in an economy that has a GDP of just $1.6 trillion — posed a danger to the economic system, which may only be acknowledged once “the bubble bursts and causes havoc”.
And with much of Australia’s economy linked to the property market, he said, the results could be catastrophic.
“There are just too many loans out there that are simply never going to be able to be repaid,” Mr David said.
“During a real estate boom, everyone is too busy speculating and making paper profits to care about what is happening … Only voices from the fringe see through the deception and raise concern, while the government, regulators, economics profession and the public are seemingly oblivious to the clear and present dangers.”
AN INSTANT PAY RISE
Among the documents in Ms Brailey’s files is a Westpac loan with a gross annual income allegedly inflated by a whopping $288,000.
The document forms part of LF Economics’ submission to the Parliamentary Inquiry into Penalties for White-Collar Crime, released earlier this month.
On it, the self-employed borrower, whose name is marked out for privacy reasons, has listed the alleged discrepancies: “motor vehicle — overinflated by $10,000; personal effects — overinflated by $100,000; monthly income — exaggerated by $14,500; rental income — exaggerated by $3456.
The Westpac customer also claims that the loan was written down as being for investment purposes when in fact it was their home; that its valuation was inflated by $25,000; that their listed occupation as an investment manager was incorrect, and that they owned an $85,000 share portfolio, when in fact they owned no shares at all.
Ms Brailey says she has thousands of documents on file showing similar cases.
Buyer’s agent and property commentator Catherine Cashmore also believes the problem is widespread.
“I’ve got clients it’s happened to, changes happen without them seeing,” Ms Cashmore said, disputing the banks’ line that they subject all loans to “rigorous checks”.
TIME FOR CHANGE?
With voters growing frustrated by repeated scandals in the banking sector, Prime Minister Malcolm Turnbull last month warned the institutions to lift their game.
ASIC, which Mr Lindsay accuses of “turning a blind eye” to mortgage fraud by banks, will soon get an extra $120 million over four years to crack down on the banking and finance sector.
Last month’s funding announcement was widely read as a move aimed at blunting Labor’s calls for a Royal Commission, which Treasurer Scott Morrison has said would “put at risk confidence in the banking system”.
None of the big four banks would provide detail of how they ensure loan application forms are accurate when contacted by news.com.au.
Westpac spokeswoman Lucy Wilson said the bank had “no tolerance for fraud”, with “systems in place to identify and thoroughly investigate any potential dishonest behaviour”.
“If fraudulent activity is discovered, we take action against those involved … liaising with the appropriate regulator and the police as required,” she said.
An ASIC spokesman said in a statement: “If someone suspects their loan application or any similar document had been altered without their knowledge or approval, that may well involve a serious misrepresentation and a complaint should be made as soon as possible.”
In its supplementary response to the parliamentary inquiry, the regulator said dishonest or fraudulent conduct was “more commonly found in relation to mortgage and finance brokers rather than lenders”.
Since taking over regulation of consumer credit in 2010, ASIC has investigated more than 50 mortgage brokers over alleged fraud relating to home loans and personal loans, with 13 criminal charges resulting in 11 convictions, including four guilty pleas. There have been at least 38 administrative actions, which usually means bannings.
The Finance Brokers Association of Australia, for its part, claims that mortgage fraud is “limited to a small section of the industry and is definitely not systemic and entrenched”.
FBAA chief executive Peter White conceded that loan tampering was a problem, but argued the practice was “not widespread”.
“Ninety nine per cent of brokers are doing the right thing but unfortunately, like in any industry, there is a tiny element who cross the line, particularly when it comes to the repayment of loans that rely on foreign income from certain countries,” Mr White said.
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).
Critics have suggested that the complexity inherent in securitization can limit investors’ ability to monitor risk, and that competitive securitization markets with multiple securitizers may be particularly prone to sharp declines in underwriting standards. Private, competitive mortgage securitization played an important role in the U.S. subprime mortgage crisis.
In addition, off-balance sheet treatment for securitizations coupled with guarantees from the issuer can hide the extent of leverage of the securitizing firm, thereby facilitating risky capital structures and leading to an under-pricing of credit risk. Off-balance sheet securitizations also played a large role in the high leverage level of U.S. financial institutions before the 2008 financial crisis, and the need for bailouts.
The granularity of pools of securitized assets can mitigate the credit risk of individual borrowers. Unlike general corporate debt, the credit quality of securitized debt is non-stationary due to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches may experience dramatic credit deterioration and loss.
Securitization has evolved from its beginnings in the late 18th century to an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3.455 trillion in the US and $652 billion in Europe. WBS (Whole Business Securitization) arrangements first appeared in the United Kingdom in the 1990s, and became common in various Commonwealth legal systems where senior creditors of an insolvent business effectively gain the right to control the company. There are main players in securitization, they include investors, securiters and corporates.
The Dodd–Frank Act (fully known as the Dodd–Frank Wall Street Reform and Consumer Protection Act) is a United States federal law that places regulation of the financial industry in the hands of the government.Feb 6, 2017