Another day, another banking scandal. This is one is closer to home. The ABC puts it in blunt terms:
In 2007 Kate Thompson was WA mortgage broker of the year. Now she is facing fraud charges.
It is alleged Mortgage Miracles, in Canning Vale in Western Australia, obtained investment loans for customers by using falsely inflated earnings and assets.
Ms Thompson admits that is exactly what she did.
And that is about as tame as the story gets. From here on in, you don't know whether to laugh or cry.
Our favourite part of the ABC story, apart from the name 'Mortgage Miracles', was this bit: 'Kate Thompson recalls the tricks banks taught brokers to get loans across the line. Such as calling rising house prices 'income'.'
What's most remarkable is that this 'income' was part of 'projected income.' In other words, the expected rise in the price of the house the borrower was buying was called 'income' to justify the lending decision! Best of all, the more expensive the house, the bigger the income figure that could be thrown into the application.
As to the rest of the loan application, one borrower claims, 'the loan amounts were wrong, my job was wrong, the amounts I earned was wrong, the small business I had, the valuation was wrong. There are 17 glaring mistakes that they had filled in that I didn't know about.'
But how can people not know what's on their mortgage application? The white knight in this story is Denise Brailey of the Banking and Finance Consumers Support Association Inc. She went to Canberra and told the Senators on the Economic References Committee about what has been going on.
CHAIR: What you are saying is that those applications were doctored after [the applicants] had looked at them?
Ms Brailey: That is right.
You have to wonder what might be lurking on your mortgage application. You'll find out in a moment why you might never know.
Don't worry too much about all this. The banks, the Reserve Bank and the media have all been telling you that this isn't a big problem in Australia:
'Much of the subprime and other non-prime lending that went on [in the US] was not based on proper assessments of borrowers' ability to service the loan. Brokers and lenders did not verify incomes or other financial obligations. We would never want to see this kind of asset-based lending in the Australian market.... I am pleased to say that I do not currently see signs of widespread lax lending practices here in Australia.'
Luci Ellis, Head of Financial Stability Department RBA, Address to the Australian Mortgage Conference 2012, 23 February 2012
Macquarie, in response to media coverage, claimed its 'verification processes for all types of loans were, and continue to be, in line with industry standards, practices and regulations.' That may be right. But the standards, practices and regulators are a joke.
Here is another highlight of Ms Brailey's testimony to the Senators, which exposes the true state of affairs:
'We have the loan application forms from over 400 people in the last six weeks. During that time, not one of them is a clean document - each one has been fraudulently dealt with.... I am a criminologist, Mr Chairman, so I understand a bit about that. The fraud is in misrepresenting the true income.'
So Australian banks might not have eased lending standards, leading to a sub-prime crisis. They just turned everyone into a prime borrower by falsifying figures on their application. Who needs lax lending standards when you can falsify income and assets? Now we don't even know who is subprime and who isn't.
Just like the Australian housing shortage turned out to be a surplus with the Census, you have to wonder how many prime borrowers might be subprime if proper stock was taken of their income and assets.
One fortunate lady was told by her bank that she owned $750,000 dollars of shares and earned tens of thousands in rental income. She offered the bank half of the assets if they could find them, because none of them existed.
In the US, they had NINJA loans - no income, no job, no assets. Here our NINJAs blend in with the prime borrowers. Including one NINJA borrower with a four million dollar loan!
Ok, so there were some bad apples.
'Only a few fringe institutions were involved in the market. There are almost no non-conforming loans being issued at the moment, with the providers of such loans having exited or gone into extended hibernation.'
Guy Debelle, Assistant Governor (Financial Markets) RBA, 30 March 2010
'MANY of the nation's biggest banks - including Westpac and Macquarie - are being forced to forgive debts granted on the basis of false information about borrowers supplied by mortgage brokers during the last property boom.
'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.'
This is worse than America's lax lending standards. It is systemic fraud conducted in a way that hides the tell-tale warning signs that would otherwise show up in the data. Australian banks learned from their American counterpartsthat subprime borrowers need to be hidden. We knew American subprime borrowers were subprime.
That made the US mess a predictable crisis. In Australia, we don't know the extent of the problem, because the subprime borrowers appear to be prime. And they are hidden well.
Most of the problem loans are so called 'no-doc loans'. These were supposed to be for business owners who had ABNs, but didn't have the usual supporting documents to show they had a job and steady income.
Macquarie points out that no-doc loans aren't subprime loans. Unfortunately, they often are, as Ms Brailey pointed out:
Senator WILLIAMS: Were low doc loans for self-employed people only?
Ms Brailey: Yes, that was the original idea: low doc for self-employed, ABNs for two years minimum plus GST registered. In these emails, I have highlighted where they show, time and time again-and some in big letters: 'We do ABNs for a day. No LMI.'
Senator WILLIAMS: Who is saying, 'We do ABNs for a day?'
Ms Brailey: The banks. There are 36 lenders involved that I have emails from showing them all doing the same thing.
Senator WILLIAMS: Are you saying that to be self-employed and to prove that you have an ABN the banks will issue you with one?
Ms Brailey: The brokers get them online. The BDMs teach the brokers to go online and get an ABN and then, 'You can do that if you have the ladies or gents TFN.'
Senator WILLIAMS: I have a document here from one of the big four banks. [It explains] While self-employed status is declared by the customer in their loan application this information is not validated during the loan approval process.
In other words, subprime borrowers need only an ABN, supplied by the banks, and a banker willing to commit fraud to become no-doc borrowers. Throw in a couple of nonexistent assets, the 'income' of rising house prices and God knows what else and you have a prime borrower.
Australia's NINJA borrowers were NINJAD. People with no income, no job, no assets, and no documents were given all four by their friendly banker. At least on paper.
The cover-up is already underway. The Americans had their Mortgage Electronic Registration System (MERS). It managed to lose and misplace documents to the point where nobody knows who owns what house. Once again, we've got something flat out worse than the Americans, as the Australian's Anthony Klan has today reported:
'One of the nation's biggest low-doc issuers, the Bendigo and Adelaide Bank, has told borrowers they are not entitled to copies of their signed loan application forms, while other major lenders have told borrowers such documents have been "destroyed", are "not relevant" or are "internal".'
The American banks might have lost documents. The Australian banks just won't give them to the borrowers. Or they destroy the documents like some sort of low grade fraudster.
The results of all this doomed lending have begun unfolding behind the scenes already. Ms Brailey reckons the banks are covering up the rising default rates in all sorts of creative ways:
'The reality is that some of these people were given buffer loans to refinance, refinance and refinance, so they are never in default. I have a list 100 people who are still in their houses and have not paid a payment for four years simply because I have been there. There is a stalemate going on. They are not taking the houses but on the other hand the defaults are there, and I do not know what figures the bankers have decided to put those into.'
Meanwhile, Ms Brailey points out how the government is making a mint off all this:
'The main thing I am going to raise, the first issue, is that the government has bought $14 billion worth of RMBSs since the GFC and I understand has committed another $4 billion to further purchases. The Fitch ratings say that eight to 10 per cent of all these RMBSs are low doc and approximately are loans obtained by fraud, and the government is holding tainted securities and profiting from that fraud. We believe there is about $57 billion involved. And, judging by the average loans, which go above FOS's jurisdiction-we are talking about maybe 100,000 families affected-a government cannot, or at least cannot be seen to be profiting from that fraud of its constituents and must rectify that situation.'
As you can tell, Ms Brailey is a true realist. Her last sentence is priceless. 'A government cannot, or at least cannot be seen to be profiting from fraud...'
That particular topic wasn't addressed by the Senators at the hearing, despite it being the 'main' issue raised. Instead, a Senator pointed out that all this isn't a big problem:
Chair: The evidence here suggests that there is no systemic issue. Obviously there will be individual cases that you can find where there have been some problems but there is no systemic problem. How do you respond to that?'
Ms Brailey: That is why we need a royal commission into the banking sector - they are strong words but that is what we need, because those figures are clearly wrong. The way the figures are translating at the moment makes you think that but that is not the reality.
Subprime was described as a 'tiny tiny' problem in the US in 2007 and 2008. It might have been true, but with all sorts of other underlying problems, a tiny tiny problem can be all it takes to unleash a financial crisis.
By the way, Australia's financial sector is now larger than all of the Eurozone's by market cap. That's despite our GDP being about a twelfth the size.
When something is this far out of whack, it tends to revert. And that means a plunge in ASX financial shares. Look out.
Until next week,
The Daily Reckoning Weekend Edition
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About the Author
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