Friday, 15 June 2012

Aussie Mortgages American Style

Aussie sub-prime data came out few days ago and the results are shocking. The story, as it unfolds, won't be anywhere near the front page of the capital city Murdoch rags and probably not until its too late and the market is in free fall.

I've put the story in its entirety below, just in case someone at Murdoch realises the truth does not set you free, especially if you get the bulk of your revenue from advertising and real estate marketing.

Courts rule against lenders as boom-time low-doc loan frenzy unravels

SUBPRIME-STYLE lending practices were rampant during the last property boom despite claims by lenders that local practices were superior to global standards.

The Australian has exclusively obtained hundreds of internal emails between lenders and mortgage brokers that lift the lid on the extent of aggressive -- and in many cases predatory -- lending practices in the five years leading up to the global financial crisis.

The emails, many of which are from some of the biggest lenders to chains of hundreds of mortgage brokers, show some spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements. The practices, which have embroiled the likes of Macquarie Bank, Westpac and GE Money, as well as mortgage brokers in every state, underpin what is emerging as the Australian version of US subprime problems.
Indeed its not different here.

As with the boom-time predatory lending practices in the US -- which triggered the global financial crisis -- The Australian has found low-income earners, the elderly, pensioners and those with limited financial experience have been hit hard by the practices.

Thousands of such borrowers -- tens of thousands by some estimates -- were stung by abuse of low-documentation and no-documentation loans, which required little or no evidence of a borrower's income, but which usually were secured by a person's family home.
The emails show it was standard practice for many major banks and scores of non-bank lenders to aggressively spruik such loans to their mortgage brokers, which dealt directly with unsophisticated or "mum and dad" clients. So-called low-doc loans, created in the 1990s, were used by a very small niche of self-employed people who were unable or unwilling to provide financial information to their banks to secure a loan.

They were in many cases tax-avoiding small business owners who had not declared their full income to the Australian Taxation Office, but who could afford home loan repayments.
Its as American as case of Budweiser.

It remains unclear why the low-doc model became necessary in the 1990s, as banks had been successfully lending to businesses and the self-employed for hundreds of years.

By about 2004, with the arrival of the US mortgage securitisation model in Australia, led by Macquarie Bank, the use of such loans exploded, eroding the traditional relationship between lenders and borrowers.

The face-to-face contact with borrowers was conducted by mortgage brokers, which offered products through "mortgage aggregators" working for "securitisers" -- such as Macquarie Bank -- which packaged the loans and sold them to the eventual loan owner -- investors on international money markets.
Why? The same reason as the American one, GREED.

Mortgage brokers had little incentive to ensure borrowers were able to make repayments on loans, as it was not their money.

They had plenty of incentives to ensure loans were granted in the form of upfront commissions of 1.5-2 per cent of the value of every loan written -- about twice the rates earned by their counterparts in the US and Britain.
Twice the commission rate? 2% on a $400K loan is $8,000. Convince the victim to get another $100K and you get that nice round $10,000.

The initial "lender", the securitiser, also had limited incentive to ensure borrowers would be able to meet loan repayments in the medium term, as loans were quickly offloaded to investors in the booming market.

The low-doc and no-doc loans, which meant borrowers were not required to prove income or ability to make loan repayments, were perfect for such an environment, and were widely abused.
Moral hazard?

By the first quarter of 2005, about $500 million worth of low-doc loans were being written weekly in Australia, according to the Market Intelligence Strategy Centre, an analyst.

In the year to June 2007, $8.8 billion of low-doc loans were written. That had fallen to just $2bn in the year to June last year, according to the centre.
$500,000,000 a week??!!

During the boom, banks and non-bank lenders were eager to sign up low-doc loans, but apparently not directly, instead leaving that to mortgage brokers.
Got to keep the hands well away from the murder weapon. "I had no idea your honour, I've never even met him".
According to the centre, about 95 per cent of low-doc and no-doc loans were written by mortgage brokers during the boom years.

By contrast, about 40 per cent of full-doc, or standard loans, were handled by brokers in that time, according to the Mortgage and Finance Association of Australia.

Banks and non-bank lenders handled most of the more stable traditional full-documentation loans, but they left brokers, who were highly motivated to approve loans, to sell the vast majority of their high-risk low-doc product to small investors.
A nest of vipers.

Securitisers such as Macquarie Bank then packaged those low-doc loans and quickly sold them to international investors.
If the Americans can do it, we can as well.

Here is the shocker...

Fitch Ratings estimates low-doc and no-doc loans now represent 8-10 per cent of the $1.2 trillion national mortgage market. That's between $96bn and $120bn.

One in 20 loans held by the big banks is low-doc or no-doc, with the figure rising to about one in 10 across the market, as non-bank lenders hold the highest proportion of such loans.
$96B to $120B in sub prime?
It has now emerged it was standard industry practice for lenders to not even call potential borrowers to check whether they could afford to make loan repayments, or to ensure the information on loan application forms was correct.
I had to check that I wasn't reading that in a US newspaper.

A key to low-documentation lending was that borrowers were self-employed, as such it was originally required that such borrowers produce an Australian business number that they had used for at least three years.
An ABN is all you needed. No proof of income.
From about 2002, as brokers grew increasingly fat on high loan turnover and bankers rich from securitising loans, lenders began further untying the already extremely loose requirements of the low-doc loan. Emails obtained by The Australian show Macquarie, Suncorp, GE Money and RAMS Home Loans Lenders began saying people could access such loans if they had an "ABN for one day".

"Under the PUMA (Macquarie) loan, we will need ABN for one day, don't disclose any assets, liabilities or income, is that any good for you," mortgage aggregator AFG wrote in 2006.

In March 2008, as the global financial crisis was taking hold, Suncorp wrote: "Did you know that at Suncorp we offer a low doc loan up to 70 per cent loan to value ratio with no minimum period for holding an ABN?"

Some lenders went further, writing low-doc loans to borrowers who had provable pay-as-you-go taxable incomes.

In these cases, lenders asked borrowers what income they earned, but not for payslips, tax returns or group certificates to verify claims.

In the case of no-doc loans, borrowers were not even required to state any income.

In some cases, evident in emails obtained by The Australian, brokers who had submitted such information in applying for loans were asked to remove income-verifying documentation.

But not only were ABN restrictions watered down, the lending standards of almost the entire lending business were trimmed.
Banking 'code of conduct' appears to be an oxymoron.
Many banks were in breach of their own code of conduct.

According to the Australian Bankers Association's Code of Banking Practice, 2003, banks must ensure borrowers are capable of meeting loan repayments.

Section 25 of the code states: "Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it."

The emails uncovered by The Australian reveal this conduct requirement was widely flouted.

Of a low-doc loan, a Westpac "relationship executive" in the bank's "broker unit" wrote to one broker in February 2006: "It has to be stated what they (the borrower) earn etc on our calculator, but it's not a formal assets and liabilities statement from an accountant.

"We need to ask what they earn etc, but we take what they say without proof."
Well the game is up and the judicial system isn't playing the right ball.
In a series of precedent-setting legal cases, nine judges before six courts have found in favour of borrowers stung by lenders who failed to ensure borrowers were able to repay before writing a loan.

In almost all cases in which borrowers have lost some or all of the money borrowed, judges have overwhelmingly sided with borrowers and ordered mortgages be extinguished, or drastically reduced, within 30 days.

John O'Donnell and wife Jill were encouraged in 2002 by an unscrupulous mortgage broker to "unlock the equity" in their home by borrowing $500,000 against it, despite the couple earning just $23,000 a year.
Back in 2002 repayments on a $500,000 loan was  around $45,000 per annum. How do you pay that on $23,000 a year?
The property scheme collapsed and the couple faced repossession of their home, but the NSW Supreme Court ordered three-quarters of that loan extinguished because the couple could not afford the loan in the first place and the lender had engaged in "unconcionable" conduct.
Oh dear. The property scheme collapsed.
In response to borrower claims, some lenders have tried to distance themselves from low-doc lending procedures, stating mortgage brokers were responsible for checking whether borrowers could repay the loans.

Judges have rejected that claim, as has the ABA.

ABA chief executive Steven Munchenberg said it was OK for lenders to require mortgage brokers to obtain documents, but lenders were regardless required to independently verify such information and verify that borrowers could afford loans.

"Under the legislation and as a matter of common legal principle under the code, you are required to ensure that you have the information and that it is accurate," Mr Munchenberg said.

"Under existing law if it is established that a loan was made and a consumer could not comply with the terms without substantial hardship they could reopen and adjust that transaction. That law has been there since 1996."

Award-winning consumer advocate Denise Brailey of the Banking and Finance Consumers Support Association has, with The Australian, been closely following loan application irregularities for several years.

"But these emails prove unconscionable and predatory lending practices were happening across the board," Ms Brailey said.

She said she was in contact with more than 100 borrowers stung by predatory lending practices. Such borrowers came from every state and territory, as well as New Zealand, and they all had one thing in common.

She instructed the borrowers to contact their lenders and request copies of their loan application forms. "In every single case they have come back astounded," Ms Brailey said.

"Their incomes are vastly inflated and in most cases there are two, even three different sets of handwriting on the forms."

Other major concerns, which also point directly to imprudent lending, was the writing of 30-year loans to people in their 70s and 80s.

In May 2008, as the global crisis unfolded, Capital First wrote to one broker that "the maximum borrower age is now 70 years".

In the emails, lenders spruik to brokers the availability of "unregulated" loans.

That means loan application forms were ticked for "investment or business purposes" and so were not covered by national credit laws.

It is not clear whether such waivers actually remove a borrower's rights, but courts have to date indicated this is unlikely.
This has only just started and its going to get very interesting. The evidence and data presented clears away the last vestige of prudence regarding bank lending and the Australian Real Estate ponzi scheme that was borne around the time Howard came to power.

It will end badly just like the USA, Ireland and Spain. I wonder how long the main stream media can keep it under wraps? When you see it on TVFTFS (TV for the fucking stupid - eg 7,9 or 10 news, A Current Affair, Today Tonight etc) you know the game is up.


  1. Interesting perspective but most of this is old news. Almost everyone involved and the market has moved on. I doubt much explosive stuff will be found.

  2. Moved on? Old news?

    Original decision Sep 2009

    Appellate decision December 2011

    6 months is not 'old' news. The Australian legals system is based on common law or case law (legal precedence). The ink isn't dry on this yet on the Appeal and the 'precedent' is set. This is just starting.

    Remember the system is about 'precedent' and the precedent is set.

    Grab the popcorn.

  3. Mr Klan's first piece on the Aussie sub prime.

    "Consumer advocate Denise Brailey, who runs the Banking & Finance Consumers Support Association, says she is dealing with more than 100 alleged victims of improper lending.

    She says borrowers who believe they have been affected should approach their lender for a copy of their loan application form, which they are entitled to by law, and check the income levels stated. Not being provided with a copy of the loan application form is a key indicator borrowers may have been subject to irregularities.

    "In every single case of the 100-plus I am dealing with," she says, "the person has not been provided with a copy of their loan application form by their mortgage broker or lender." She says borrowers are entitled to such information by law. However, banks and other lenders have "stonewalled" such requests.

    "Every time the borrowers receive the forms they are blown away," Brailey says. "Incomes have been grossly exaggerated, false employment job descriptions have been entered or they have been stated as being employed when they're not."

    Judges have sought, in most cases, to restore borrowers to the position they were in before they were subject to unscrupulous practices. That means borrowers need to establish they have been subject to unscrupulous lending -- often by establishing their income has been improperly stated -- and that they have been financially hurt as a result.

    Brailey says she has been in contact with numerous lawyers considering class actions against suspect lenders and mortgage brokers; however, they are deterred by the fact those people facing the loss of their homes often have little money to pay for legal fees.

    She says one avenue for aggrieved borrowers is the Financial Ombudsman Service, which is funded by lenders and has acted as mediator between borrowers and lenders in many such cases, often reducing loans by hundreds of millions of dollars. Such mediation is free; however, Brailey says borrowers tend to receive substantially less favourable outcomes under that process than if they can fund legal action.

    Ombudsman Philip Field says borrowers subject to loan application irregularities, or "maladministration", have been granted mortgage reductions of 25 per cent to 100 per cent, depending on a range of factors, including the losses incurred by those borrowers."

    This is just starting.

  4. The game is up. I saw a story about this on today tonight a few days ago.

    I was amazed because usually the msm won't touch these sort of stories.

  5. this only confirms what many people saw in past. We have bubble that will dwarf US and Irish once.

  6. i think it was in the past. but it is useful for me to get information.