Australia’s sub-prime lending


By Leith van Onselen

Back in April, The Australian reported how Australia’s largest banks are being forced to forgive mortgage debts of borrowers granted loans based on falsified or fraudulent information supplied by mortgage brokers:

Under the scams, which draw parallels with US sub-prime lending practices, a number of mortgage brokers have been found to have substantially inflated incomes of low-income earners to allow them to borrow far more than they were able to repay.

The Weekend Australian has also obtained dozens of emails between lenders and brokers that show the aggressive tactics of lenders used during the boom before the global financial crisis.

These include spruiking “ABN for one day” strategies, which helped borrowers on low incomes get bigger loans by providing them with an Australian Business Number to give the impression they were self-employed.

Under other schemes, typically asset-rich but income-poor homeowners were encouraged by brokers to “unlock” the equity in their homes by borrowing against them to buy investment properties. Because banks require evidence of a borrower’s ability to repay loans, information such as income levels have in many cases been falsely inflated by brokers before being submitted to banks.

A string of recent court cases have found in favour of borrowers caught out by such behaviour, and ordered the banks — who ultimately made the loans — to forgive the debts on the basis they did not abide by their own lending practices in too easily accepting falsified broker applications.

Then in June, The Australian followed-up (here and here) with further insight into Australia’s sub-prime lending, and the battle playing-out between unscrupulous lenders and borrowers:


THOUSANDS of struggling homeowners could walk away from their mortgages as a series of court cases helps to expose widespread improper lending practices involving some of the nation’s biggest financial institutions.

Finance industry giants are spending millions of dollars on legal fees fighting homeowners who have successfully exited their mortgages because they were stung by sub-prime-style lending practices during the last property boom. An investigation by The Australian has revealed several mortgage providers and mortgage brokers engaged in improper lending practices in the years before the global financial crisis hit in 2008, including inflating borrowers’ income and ability to repay debts to secure so-called “low-doc” loans.

Courts in several states have sided with homeowners who have defaulted on their loans, extinguishing their mortgages. The rulings have encouraged other lenders to reach settlements with borrowers that are saving homeowners hundreds of thousands of dollars. And the issue could be tested in the High Court in coming months…

The declining health of loans could have ramifications for the federal government, which has put about $14 billion into securitised mortgage investments – packages of home loans known as “residential mortgage backed securities” – since the GFC…

The Australian has amassed evidence of widespread improper lending activity based around abuse of low-documentation lending products.

In the race to provide credit – and earn commissions – major lenders such as Macquarie, Suncorp and GE Money spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements.

Low-doc or “no-doc” loans were supposed to be only for self-employed business owners who could not provide standard loan information. Borrowers typically pay a higher interest rate to reflect their lack of a regular credit and income history.

But in scores of emails those lenders – and many others – told mortgage brokers that borrowers needed only to register an Australian Business Number “for one day” to secure low-doc or no-doc loans…

The Australian has also discovered cases of mortgage brokers, loan originators and others inflating borrowers’ stated incomes on loan application forms without their knowledge.

…judges found lenders had acted inappropriately by engaging in “asset lending” – that is, lending money based solely on the fact that the loan is secured by an asset, usually a person’s home, and paying little or no regard as to whether the borrower could afford the loan…

In light of those judgments, lenders such as Westpac are scrambling to settle with borrowers who claim to have been wronged. In many cases, hundreds of thousands of dollars are being wiped from mortgages.

In every court case heard, lenders had failed to make simple checks, such as calling prospective borrowers to verify their stated incomes or employment status.

Now further claims of sub-prime lending practices have been revealed, with a consumer advocate accusing the banks at yesterday’s Senate Inquiry into the post-GFC banking sector:

AUSTRALIAN banks have been accused of giving home loans to people who can’t afford them, and doctoring the paperwork so the loans looked OK.

A consumer advocate has told a Senate inquiry into the banking sector this has serious implications for the federal government, which has invested billions of dollars in residential mortgage-backed securities (RMBS), which are repackaged home loans.

Banking and Finance Consumer Support Association president Denise Brailey said that in the past six weeks she had seen low-document or no-document loan applications from 400 people, and each one had been tampered with after being signed.

“Not one of them is a clean document,” Mrs Brailey told the inquiry in Canberra on Wednesday.

In some cases, the loan application documentation showed someone on $40,000 a year was earning closer to $180,000.

She claimed this had occurred under the guidance provided by banks to brokers.

The government has invested just over $15 billion in the RMBS market in its attempt to restart securitisation in Australia and provide cheaper funding for the banking sector after the market effectively shut down because of the global financial crisis (GFC).

Mrs Brailey said international credit ratings agency Fitch Ratings had estimated that eight to 10 per cent of RMBS’s comprised low-doc loans and some $2 billion of loans were obtained fraudulently.

“The government is holding tainted securities,” she said.

“The government cannot be seen profiting from that fraud.”

She said the Australian Securities and Investments Commission (ASIC) had failed to regulate the financial industry.

“ASIC did nothing before the GFC, nothing during the GFC, and refused by letters to me and to other people within our group, to do anything since the GFC,” she said.


Let’s hope the issues highlighted in the above articles are not just the tip of the iceberg. It is not only the obvious fraud that is the problem, but that lending risk is granular. If misrepresentation of income was commonplace, then how many more bad loans are out there that we don’t yet know about? Like in the US, sub-prime lending was not a problem whilst home prices were increasing. But once prices began falling, delinquencies, foreclosures and recriminations exploded.

If anything, the emergence of these revelations strengthens the case for a warts-and-all Financial System Inquiry. The last inquiry (the “Wallis Inquiry”), which focused on regulating the financial system, was completed in 1997, and the world of finance has changed markedly since that time.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.