Claims that Australia’s banking sector is conservative, safe and secure have taken a bath in recent days as evidence has emerged of Australia’s own sub-prime lending scandal.
In April, we learned via the Australian newspaper 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.
Then in June, the Australian followed-up with further reports (here and here) of Australian sub-prime lending, and the battle playing-out between unscrupulous lenders and borrowers.
Now the Senate Inquiry into the post-GFC banking sector has revealed several instances of banks providing home loans to people who can’t afford them, and doctoring the paperwork so the loans looked okay. As well as allegations of widespread boosting in loan approvals.
Perhaps the most shocking of the revelations are instances where the banks have been enticing elderly Australians into Ponzi-like mortgages that they had no way of repaying.
In response to the evidence of widespread improper lending practices and the subsequent regulatory inaction, National Party Senator, John Williams, is now calling for a Royal Commission into the banking sector, noting that “If only 10 per cent of what comes in to my office is true . . . we have a problem and we should have a royal commission”.
For now, Australia’s lenders appear reluctant to cooperate. With a Document Retention policy that would do the tobacco industry proud, lenders are refusing to provide low-doc borrowers with copies of their applications, while other lenders have told borrowers that such documents have been destroyed.
Last night’s 7.30 Report ran a story shining more light on the emerging sub-prime scandal. The video is above and the transcript is provided below. You can find the original HD video and transcript here.
Australian Broadcasting Corporation
Broadcast: 13/08/2012
Reporter: Stephen Long
Fraud charges and repossessions are two outcomes of loans provided without all the usual documents required according to a former mortgage broker.
Transcript
LEIGH SALES, PRESENTER: America’s subprime mortgage scandal triggered the Global Financial Crisis and the world’s still recovering from it. What’s less known is that Australia too had its own subprime loans scam, the full extent of which is only just emerging.
Banks and other lenders abused the system of so-called low doc loans, which are designed for small business people.
They were sold by the thousands to pensioners, single mums and people on welfare and many investors are still struggling to pay the price of it. Stephen Long has the story.
FEMALE NEWSREADER (2008): Major Fraud Squad detectives raided the business premises of Mortgage Miracles at a shopping complex on Ranford Road, Canning Vale. They seized a truckload of documents and several computer hard drives. It’s understood the director of the company Kate Thompson was out of town.
STEPHEN LONG, REPORTER: In 2007, Kate Thompson was WA Mortgage Broker of the Year. Now, she’s facing fraud charges.
KATE THOMPSON, FORMER MORTGAGE BROKER: I was probably earning about $5 million a year. It was great. It was wonderful. But it was all a lie.
FEMALE NEWSREADER (2008): It’s alleged Mortgage Miracles obtained investment loans for customers by using falsely inflated earnings and assets.
STEPHEN LONG: But she wasn’t alone. And now Kate Thompson is blowing the whistle on the banks that conspired in Australia’s own subprime mortgage scandal.
KATE THOMPSON: Hook me up and hook them up to a lie detector test and let’s talk. I’ll lay my evidence on the table. Let’s talk, you know? They will fail a lie detector test measurably. They are corrupt, they are protecting each other.
STEPHEN LONG: Along with similar claims before a parliamentary inquiry last week, her evidence has the potential to rock the finance industry.
DENISE BRAILEY, CONSUMER ACTIVISIT: Through a series of emails from banks to brokers instructing the brokers how to get their deals across the line, make the deal fit. They targeted older people, carers, people on parenting allowance, aged pensions.
STEPHEN LONG: The evidence suggests that banks and other lenders tacitly encouraged mortgage brokers en masse to make up fictitious stories about customers so they could get loans and to falsify their income.
KATE THOMPSON: I do not think there was a bank or non-bank lender that wasn’t doing it. I – from my files alone, I am certain I could evidence every single bank.
STEPHEN LONG: The allegations centre on low doc loans. They were initially designed for the self-employed and small business people, recognising that they can lack documents such as pay slips, group certificates and the certainty of income banks demand for conventional lending. But low docs became a free-for-all.
KATE THOMPSON: They were very tight to begin with. You couldn’t do this and you couldn’t do that. And eventually, they were absolutely shocking. No rules at all. “Tell us what we wanna hear.” “Tell us anything.”
STEPHEN LONG: As banks competed aggressively to sell their loans, the pitch to the brokers was persuasive.
BANK ADVERTISEMENT (male voiceover): No docs? No problem.
BANK ADVERTISEMENT (male voiceover): Self-employed for a day.
BANK ADVERTISEMENT (male voiceover): One day ABN!
BANK ADVERTISEMENT (female voiceover): No ABN required!
BANK ADVERTISEMENT (male voiceover): No assets.
BANK ADVERTISEMENT (male voiceover): Need to ask what they earn?
BANK ADVERTISEMENT (male voiceover): Take what they say without proof.
DENISE BRAILEY: Well, it’s really a roll call of all the major banks. We’ve got Macquarie in there, we’ve got Westpac, NAB, ANZ, Commonwealth – they’re all represented in here.
STEPHEN LONG: Consumer activist Denise Brailey has dedicated herself to exposing the scandal.
And what’s this one-day ABN?
DENISE BRAILEY: Well that’s the whole point of why we’re saying it’s so fraudulent, because low docs was supposed to be for two years self-employed, and here they’re saying, “Yes, but ignore that. Sign up anyone, whether they’re on a pension ,and get them an ABN number by going online and putting the number on the form.”
STEPHEN LONG: So, as long as they’ve had a business number for one day, …
DENISE BRAILEY: Yes.
STEPHEN LONG: … they can get those low doc loans supposedly for business people?
DENISE BRAILEY: Yes and the bank would automatically approve it.
KATE THOMPSON: How many genuine one-day self-employed people do you have? In eight years of finance broking, I only ever met one real person.
STEPHEN LONG: On the Pacific Highway just south of Newcastle in New South Wales is the home of Michelle Matheson, a single mother of three. A few years ago, juggling bills, she contacted a local business that said it could help people manage their money. The advisor who saw her was in fact a mortgage broker.
MICHELLE MATHESON: He then took me down the path of purchasing a home. And unfortunately I guess the journey along the way has been quite, um, abhorrent, to be quite honest.
STEPHEN LONG: What was your income at the time?
MICHELLE MATHESON: As a sole parent, at the time, and working part-time, probably around about the $24,000 mark. You know, give or take $60 or $70 possibly, like in terms of the actual, yeah, accurate income.
STEPHEN LONG: So you were a sole parent, three kids, $24,000 a year and you were told you could buy a home?
MICHELLE MATHESON: That’s correct, yeah.
STEPHEN LONG: The loan application, which she only received recently, said Michelle was a self-employed professional and had grossly overstated her income.
MICHELLE MATHESON: My income has been stated, not obviously by myself, but either by the broker or somebody at the bank – has been stated to be $75,000 per year. The previous year’s income was $70,000.
STEPHEN LONG: She named the house “Hope”. The situation was hopeless.
MICHELLE MATHESON: I’ve taken on two to three jobs at a time, sold everything to make mortgage payments. I’ve got credit card debt of close to $30,000 because I’ve had to put mortgage payments onto that.
STEPHEN LONG: The broker convinced Denise’s mother to take out a second mortgage.
MICHELLE MATHESON: Mum had to sell her house to stop the option of this home.
STEPHEN LONG: And move to a caravan park.
Over in Perth, Kate Thompson recalls the tricks banks taught brokers to get loans across the line, such as calling rising house prices “income”.
KATE THOMPSON: So when we’re putting down a customer’s income, we are allowed – we were allowed to use capital growth. It was projected income. It’s not disposable income. But we were allowed to use it.
STEPHEN LONG: These are some of the people caught up in the low doc loans scandal.
WOMAN: If you can’t trust your bank manager, who can you trust?
STEPHEN LONG: Their stories have a common theme.
MAN: The loan amounts were wrong. My – and my job was wrong. The amounts I earned was wrong. A small business I had, the valuations was wrong. So there’s 17 glaring mistakes that they had filled in that I didn’t know about.
WOMAN: The head office actually said to me, “Ms (inaudible) I’ve no idea how you got yourself into this mess. You’ve got $750,000 worth of shares and you’ve got $13,000 worth of income from rental properties you have rented out.” And I said, “Well if you can find it, I’ll give you half of it because it doesn’t exist.”
WOMAN II: My total loans were $4.5 million with no income and a 30-year period, which would take me up to 103.
WOMAN: From around the nation they gathered in Canberra as senators heard evidence on the low doc scandal.
DENISE BRAILEY: We need a Royal Commission into the banking sector. They’re strong words, but that’s what we need, because those figures are clearly wrong.
STEPHEN LONG: Denise Brailey says she’s received about 500 loan application forms from people in trouble with low doc loans and not one is clean. The figures fudged, the details forged by brokers or bank officers themselves.
KATE THOMPSON: Six or seven of those bank officers actually used to come into my office and write up the applications themselves. Fudged figures, yes. Let’s – you know, they make it fit. And that’s what they were telling us to do and they were prepared to do it themselves. They were doing it themselves. They knew the game. You know, these people are losing their homes. There is nothing now I can do except tell it like it is.
LEIGH SALES: Stephen Long reporting.
As noted previously, 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.
The emergence of these revelations also 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, much of it for the worse.
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.
