ASIC to rein in housing spruikers


The AFR has a happy piece this morning on the efforts of ASIC to reign in mortgage fraud:

The Australian Securities and Investments Commission is stepping up action against dishonest mortgage ­brokers as part of a strategy to head off an expected surge in fraud in the hot housing market.

The corporate regulator will announce on Thursday it has banned two former mortgage brokers for providing false or misleading information to secure loans.

The latest cases bring the number of mortgage brokers ASIC has banned or convicted over dishonest home-loan applications to eight in the last three months. There are another 23 similar ­investigations currently under way.

My favourite anecdote from the last cycle is this one From The Great Crash of 2008:

A growing network of mortgage brokers held no deposits, had no reputational risk with investors and were paid in part by fees for mortgage volume. Amidst the rising arrears rates for Australian RMBS, the highest levels of default were apparent within broker-originated loans. Many of the industry participants interviewed for this book describe widespread fraud in underwriting standards managed by brokers. Endemic malpractices included getting clients to sign blank declarations of affordability (and income if relevant) and then working back to how much the client needed to earn to afford the loan.

When the market was in its mania, there was little subtlety in this practice. Audits of the files would readily demonstrate differences in handwriting. Some remarkable outcomes eventuated. Elderly applicants, either retired or in blue-collar occupations, were claiming to have extraordinarily high incomes. GE Money introduced what it called a ‘sanity test’ to forestall these types of occurrences in 2005. Another trick in the fraudster’s handbook was to put up the application as an investment loan (therefore getting the benefit of the potential rental income to augment serviceability) when it was clear that the application was actually for owner occupation.

This went hand in hand with the practice of ‘necking kids’; that is, not declaring dependants to increase the applicants’ available income.

In 2007, the Federal Court ordered one mortgage broker to pay a former client A$32 000 in compensation after the broker falsified documents to ensure a A$365 000 mortgage for the 20-year-old, unemployed, dyslexic and homeless man. The same broker was in court for similar abuses in 2009.

Similar stories will come around this time.

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    • That article reads like it was written by a teenager. Just look at the quality of the concluding paragraph:

      “So while in Australia house prices are expected to grow moderately, with some pressure from rising unemployment rates, in Canada prices are expected to fall despite low interest rates as it is believed rates will rise again soon and home owners are even more sensitive there to interest rate rises.”

    • Actually – that might be a fortunate typo – if you can’t beat them – reign them! 😛

      You know, “it’s not illegal if ASIC does it”

      PS: H&H – the typo is also replicated in the first line of the article! 🙂

  1. It’s good to see that ASIC are doing the job that they have been entrusted to do. Really there has been a number of reported breaches by brokers from minor discrepancies to major fraud, so the system is working.

    I wouldn’t call mortgage fraud spruiking though, the two issues are quite separate. Most mortgage fraud is perpetrated by the applicants, but with comprehensive credit reporting coming in very shortly that’s going to be very difficult in the future.

    I also have some difficulty with a sentence that contains both “GE” and the word “Sanity” – the two words are completely incompatible.

      • I see the data Chuck, you can believe whatever you like, but never imagine that people won’t lie and provide fraudulent documentation to secure a loan.

        Everyone thinks that they are honest trustworthy borrowers, and they will lie cheat and steal to prove it.

      • @ Peter Fraser

        “I see the data Chuck, you can believe whatever you like, but never imagine that people won’t lie and provide fraudulent documentation to secure a loan.”

        Sorry, pal. I’ve worked for one of the Big Four and know how the broker channel is ‘managed’.

        When you’re in a hole…………stop digging.

    • ‘but with comprehensive credit reporting coming in very shortly that’s going to be very difficult in the future’

      You’ve been telling us for years the system is robust, with adequate safety nets in place. Has NCCP been a failure or is it just weak?

    • Denise Brailey’s research showed very clearly that the fraud was initiated by the banks. Their staff were guiding the brokers how to respond to the loan application forms in order to secure the approval. No-one’s suggesting the applicants were completely innocent but the weight of responsibility should fall with the professionals involved.

      • Concur… with capital one and assorted sundry bottom line bonus boosters. Lets not forget the reevaluation of assets and margin calls on loans used by big banks to scoop up property’s on the cheep too. Then turn around and with in less than a month whack an upward evaluation on the same property after foreclosing.

        Brokers caused the sub prime melt down… give me a #%*(.

        Skippy… rot from the head down syndrome…. and not the bottom up.

      • Yes I’ve read Denise Braileys work. Mostly I think it’s rubbish, the fraud was perpetrated by brokers, perhaps with some assistance unwitting or otherwise by the banks BDM’s.

        BDM’s do receive a bonus based on the volumes written by their brokers, but the one who received the greatest financial benefit was the broker. Blaming the BDM’s was that brokers last desperate effort to defend herself.

        That broker is now in jail, which is where she belongs.

      • The fraud was systemic, and it was initiated by the banks.

        As always, the beneficiaries of the current system try to reduce it to a few bad apples.

    • Sorry Peter but my experience is quite the contrary. The vast majority of mortgage fraud that I uncover is perpetrated by the broker. They have the skills, and knowledge of lender policies and systems, to know what they can get through and what they cannot. That does not excuse the borrowers – often they are complicit by signing blank application forms, or signing declarations that the information is true and correct when they know it is not. The evidence is compelling – arrears and loss rates on broker introduced loans (while still quite low) are around 10 times higher that where we write the loan directly with the applicant.
      We do agree on Denise Brailey – a self-promoting loon.

      • Hi Mander – I can’t comment on what you have said without knowing which space you work in, LMI, big 4, small bank, mortgage manager, specialist lender, ASIC etc – all of those experiences will be different.

        I accept that the large fraud cases will be caused by brokers, especially in the low doc space and prior to the tightening of the verification using BAS, ato portals, working account statements etc.

      • Peter – I have held senior Risk Management and Lending positions in LMI, ADIs, mortgage trust management (prime and specialist lending) in Australia and New Zealand and also as a director of one of the Alternate Dispute Resolution Schemes.
        On a weekly basis, even now, we detect fraudulent loan applications in both full doc and alt doc loans. On investigation, for the majority of the broker introduced fraudulent applications the broker was involved. Around 50% of our lending is done directly with the borrowers – we apply exactly the same fraud detections tools and methodology and rarely do we detect fraud. The average borrower simply does not have the tools or knowledge to successfully get a fraudulent loan through.

      • Mander – that’s interesting. The DRS position would be enlightening – alternate? NZ perhaps? I only know of two in Australia.

        What level of fraud are you detecting?

    • I’d be interested to know exactly how ‘comprehensive credit reporting’ differs from our current practice.

      I just thought the LNP was all about deregulation and let business do whatever it likes, I can’t imagine them introducing more stringent requirements.