The UBS banking team has released its annual survey on factual inaccuracies in Australian mortgage applications, and the results aren’t pretty.
It shows that in 2017, only 67% of respondents said that their mortgage application was “completely factual and accurate”.
That means one third of mortgage applications contained factual inaccuracies — the highest level in the three-year history of the report.
The analysts referred to such discrepancies as “liar loans” — a phrase made popular in the US during the global financial crisis to describe loans approved with poor documentation.
The report is based on a survey in July and August this year of 907 respondents across Australia who had taken out a mortgage within the last 12 months.
Analysts Jonathon Mott, Rachel Bentvelzen and George Tharenou then set out a comparative report based on their findings from 2015 and 2016.
“Given the rising level of misstatement over multiple years we estimate there are now approximately $500 billion of factually inaccurate mortgages on the banks’ books,” the analysts said.
Broken down by lending channel, there was a notable rise in factual inaccuracies for borrowers who used a mortgage broker, as opposed to negotiating directly with the bank.
When using a mortgage broker, 39% of respondents said their application contained inaccuracies — up from 32% in the prior year. That was materially higher than the 25% for bank mortgages (up from 22% in 2016), and it didn’t escape the attentions of UBS.
“While the significant level of mortgage misrepresentation is a concern, we are more concerned that a substantial number of applicants continue to state that their mortgage consultant suggested they misrepresent their documentation,” they said.
Turning to an analysis of inaccurate applications by major bank, the results showed that ANZ led the way with 45% of applications misstated:
The number of incorrect applications at ANZ was “statistically significant” compared to the 2017 industry average, the analysts said.
For respondents who reported factual inaccuracies, the most common form of misrepresentation was an understatement of living costs:
There were also notable differences in the type of inaccuries, depending on whether applicants used a broker or negotiated with the bank directly.
For example, when using a broker 18% of respondents said that they overstated their income, compared to 6% via the bank network.
So what does it mean for Australian banks and the economy more broadly?
The UBS team argued that the survey reflects a level of complacency in Australia, following 26 years of economic growth and steadily rising house prices.
However, given that Australia’s historically high levels of household debt continue to rise faster than incomes, the results clearly indicate an increased level of risk.
Borrowers “are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate”, the analysts said.
They argued that stricter application processes by the banks are required, and suggested that ATO tax returns should be a requirement for proof of income.
For now, the UBS team remain “underweight Australian banks and are very cautious on the medium term outlook”.