‘Liar loans’ risk Australian housing market

Liar loans first came to prominence in the sub-prime loan market in the USA. It refers to people who may have knowing lied about their financial situation in order to get a loan (to buy a house), or the actual mortgage broker filling out the application form with misleading information. Some of these people were promised shiny new houses at no interest (at first), and some brokers were just making bonus. The party of deceit came to a head when Lehman Brothers famously collapsed, with other institutional names like Bear Stearn, AIG, and even HBOS and RBS in Europe followed suit, with some being bailed out by their respective Governments.

All of this is skilfully summarized in Michael Lewis’s book “The Big Short”, which was recently made into a movie.

Since 2008, regulators around the globe have been doing all they can to prevent a similar sub-prime catastrophe. The Basel Committee on Banking Supervision which looks at cross-border regulatory issues for banks enacted Basel III, an accord which closed a number of the loop holes exploited by banks in their pre-GFC activities.

History rhymes

This week, UBS has released a report purporting 1/3 of Australians lie on their mortgage applications. The survey is completely anonymous, and asked 907 respondents that had taken a mortgage out of the last 12mths whether their application was “completely factual and accurate” right through to “partially factual and accurate” or “rather not say”.

The disturbing part is the survey of liars is up from 28% this time last year to now 33% of applications built on lies. This is despite better technology, and tighter oversight by regulators. Mortgage approvals are at record levels; which suggests that mortgage writing standards might not have tightened.

UBS now estimate that around $500b of Australian home loans are liar loans. NSW/ACT seem to have the highest number of ‘liars’.

It’s a disturbing development when considering the housing affordability issues, low wage growth and all time high household debt to income ratios.