Lied is a strong word. The Oxford English Dictionary says that a lie is “an intentionally false statement”.
But, after reading the latest research piece on Australian mortgage holders from investment bank UBS, it is impossible to come to any other conclusion that a large proportion of Australians who took out loans in the last 24 months lied on their application.
The research, titled “Mortgages – Time for the Truth?”, discusses the result of a survey conducted by the bank of 1,228 Australians who have recently taken out a mortgage.
Those surveyed were asked to answer 63 questions and UBS said “given the large number and spread of participants, these findings are statistically significant with a 95% degree of confidence”.
That makes the finding that “28% of mortgagors stated their application was not factually accurate” a dangerous revelation for the health of the Australian housing market and of Australian households should they fall on hard times, or rates need to rise.
The most significant findings of the survey were (emphasis added):
(1) Only 72% of respondents stated their application was “completely factual and accurate”. 21% stated they were “mostly factual and accurate”, 5% stated they were “partially factual and accurate” while 2% “would rather not say”;
(2) 32% of respondents who secured a mortgage via a broker stated they misrepresented some element of their application, compared to 22% who secured a mortgage via bank distribution;
(3) More concerning, 41% of respondents who used a broker in 2016 and misrepresented elements of their application stated they did so based on their broker’s suggestion (vs 13% for bank channel equivalent).
The research from UBS appears to corroborate the work done earlier this year by John Hempton of Bronte Capital, and Jonathan Tepper, an economist and founder of Variant Perception, who posed as home buyers and toured Sydney’s western suburbs viewing housing developments and meeting mortgage brokers.
One of the findings was a lie on your loan application won’t get checked.
What’s concerning about these latest findings is that UBS says “survey results suggest misrepresentation is systemic with findings similar across the 2015 and 2016 Vintages, price to income levels, LVR, owner occupiers and investors”.
More worryingly still is that the most vulnerable households to financial stress appear to be the ones who feel the need to lie.
There was a correlation between borrowers who misrepresented their application and “those whose expenditure was broadly equal to their income; stated they are under financial stress; or have missed a debt payment”, UBS said.
And it seems that investors, or lenders, might be pulling the wool over APRA and the RBA’s eyes because the survey showed “the use of mortgages for investment purposes accelerated in 2016 contrary to the banks’, RBA and APRA’s data”, UBS said.
It’s a worrying picture of a market that is likely to be structurally weaker than it appears on face value should any significant deterioration in the economy or the employment market hit households.
UBS says the results are “disturbing” given “the recent housing market reacceleration; elevated household leverage (186% debt to income); and mortgages accounting for 62% of bank loans”.
And it says that even though APRA has caused banks to tighten underwriting standards, “it does not appear to have prevented applicants ‘stretching the truth’”.
What’s most disturbing about this is that from a behavioural point of view, the prevalence of loan applications which are “not factually accurate” suggests a large number of Australians, 28% in the case of this survey, who believe that housing is such a must-have asset – and clearly one who’s price is only going up, and that they are comfortable telling lies to get the loan for it.
It’s not a problem today, UBS says, because “low unemployment and rising house prices may help prevent losses near term”.
But it could be in the future if the economy slows. UBS says at the very least, “more rigorous auditing of applications appears essential, especially via brokers”.
Clearly something needs to be done.
Disclaimer: Greg McKenna has been working in banking and financial markets since 1986. He is currently a Director of Police Bank.