There are predators in our own backyard, but where are our financial watchdogs?

Aug17
by David Lawson on August 17, 2012 at 10:24 am

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By Philip Soos

The Con­ver­sa­tion

The level of sub-prime mort­gages in Aus­tralia may be far in advance of what was pre­vi­ously assumed and pro­vided for by banks. The story was bro­ken on the ABC, and cov­eredelse­where. The rev­e­la­tions cen­tred around two per­son­al­i­ties: Kate Thomp­son and Denise Brailey.

Kate Thomp­son was a licensed mort­gage bro­ker at Mort­gage Mir­a­cles in West­ern Aus­tralia. A highly regarded and award-winning bro­ker, Thomp­son dis­bursed a ver­i­ta­ble tor­rent of credit from bank and non-banking lenders to clients want­ing funds to buy prop­erty, mak­ing around $5 mil­lion a year from upfront and trail­ing com­mis­sions. She is now fac­ing fraud charges for what amounts to preda­tory lend­ing: pro­vid­ing credit to peo­ple with lit­tle to no expec­ta­tion they will be able to repay the entirety of the loan. This fraud was achieved by fudg­ing the income and assets of clients, mak­ing them appear much wealth­ier on paper than was the case. Soon to face the State Admin­is­tra­tive Tri­bunal in West­ern Aus­tralia, Thomp­son will pro­vide incrim­i­nat­ing evi­dence that preda­tory lend­ing is wide­spread through­out the industry.

Denise Brai­ley is the Pres­i­dent of the Bank­ing & Finance Con­sumers Sup­port Asso­ci­a­tion, an organ­i­sa­tion ded­i­cated to pro­tect­ing the pub­lic against preda­tory financiers. Hav­ing worked in this field for the last twenty years, crim­i­nol­o­gist Brai­ley has seen first-hand the finan­cial and social wreck­age wrought by a mul­ti­tude of scams and preda­tory lending.

Last week, Brai­ley gave explo­sive tes­ti­mony before the Sen­ate Eco­nom­ics Ref­er­ences Com­mit­tee alleg­ing wide-scale fraud from banks to brokers.

While her tes­ti­mony, which cov­ers the period of 2008 to the present, was largely about low-doc loans, her claims extend into the main­stream of full-doc mortgages.

Cer­tainly, what emerges is a shock to those who believe the claims of the RBA and reg­u­la­tory agen­cies that Australia’s bank­ing and finan­cial sys­tem is a pic­ture of pru­dence and reticence.

The term “non-conforming” denotes a mort­gage to an owner-occupier or investor where the loan value does not match the fun­da­men­tal bor­rower cri­te­ria of tan­gi­ble assets and income. Low-doc loans are pro­vided to those who have dif­fi­culty in prov­ing their income, mainly the self-employed.

In the desire to cre­ate bank assets, loans were granted to almost any­one who asked for them. For instance, it was recently revealed that three years ago, West­pac granted a $440,000 loan to a 98-year-old pensioner.

Brai­ley tes­ti­fied about the way these loans were con­ceived. Clients would approach a bro­ker and com­plete a small form, detail­ing their cur­rent assets and income. Through an online “ser­vice cal­cu­la­tor” cre­ated by the banks, the bro­ker would enter clients’ details and cre­ate a highly-inflated fig­ure. Amaz­ingly, this would include the imputed rent (the rent that owner-occupiers pay them­selves), even if the prop­erty being pur­chased was a vacant block of land.

Antic­i­pated increases in the value of the clients’ prin­ci­pal place of res­i­dence – essen­tially, esti­mated unre­alised future cap­i­tal gains – are counted as cur­rent income. Banks’ own lend­ing cri­te­ria sug­gests that for a low-doc loan to be approved, a per­son needs to have an ABN for a min­i­mum of two years. Unbe­liev­ably, for those with­out an ABN, the banks were teach­ing bro­kers how to go online to cre­ate an ABN for a client within a day, often with­out lenders mort­gage insur­ance (LMI). This was done in the back office after the form was signed, with­out the clients’ knowledge.

As the form passed through the back chan­nels from bro­ker to bank, the three pages mor­phed into a higher num­ber, typ­i­cally 11, up to a total of 39. These extra pages detailed the fig­ures pro­vided by the ser­vice cal­cu­la­tor. Bor­row­ers, how­ever, never get to see these extra pages, and Free­dom of Infor­ma­tion requests do not work on the pri­vate sec­tor. When asked, banks and their law firms send bor­row­ers on a merry-go round between them, and of course, low and moderate-income bor­row­ers don’t have the finan­cial power to sue the banks to get them. Once the fig­ures have been fudged, the loan is approved and the bank grants the mort­gage to the client.

Brai­ley says she has over 4,000 doc­u­ments relat­ing to bor­row­ers’ loan appli­ca­tions and emails between the bro­kers and banks, clearly show­ing how incomes and wealth were grossly inflated. And this prac­tice is con­tin­u­ing. Brai­ley con­tends that of 400 loan appli­ca­tions she has gath­ered in the last six weeks, not one was free from tampering.

Appallingly, both banks and bro­kers tar­geted a seg­ment of the pop­u­la­tion they called ARIPs: asset-rich, income poor. They iden­ti­fied pen­sion­ers, the dis­abled, retirees and sin­gle moth­ers in this group. Incomes of $40,000 were trans­formed into $180,000 through account­ing manipulation.

Inter­est­ingly, the banks pro­vide gen­er­ous com­mis­sions for the mort­gage man­agers, orig­i­na­tors and intro­duc­ers, cul­mi­nat­ing in the bro­ker at the end of the line. This hap­pens to be a highly inef­fi­cient method of allo­cat­ing mort­gages to bor­row­ers, as banks could sim­ply hire more loan offi­cers instead. The rea­son for this chain, Brai­ley tes­ti­fied, is to cre­ate “six degrees of sep­a­ra­tion” between the banks and bro­kers, in order to pro­tect banks by out­sourc­ing respon­si­bil­ity to the bro­kers to ensure they, not the banks, get the blame for fraud.

Why are banks lend­ing out enor­mous amounts of credit to any­one who asks for it? The likely cause is the esca­la­tion of res­i­den­tial prop­erty val­ues over the last 15 years, requir­ing larger mort­gages for prop­erty purchases.

To main­tain prof­itabil­ity, banks have to keep issu­ing ever-more credit. Unsur­pris­ingly, the stock of mort­gage debt has increased from $180 bil­lion in 1996 to over $1.2 tril­lion today or85% of GDP, a tremen­dous finan­cial burden.

The other ques­tion is where the reg­u­la­tors have been in all of this. In 2005, Brai­ley met with Aus­tralian Tax Office inves­ti­ga­tors, but she con­tends her claims were referred to the Aus­tralian Secu­ri­ties and Invest­ments Com­mis­sion, which did not pur­sue them. As the finan­cial reg­u­la­tor, it must inves­ti­gate fraud, espe­cially when sub­stain­tial evi­dence is pro­vided. Accord­ingly to Brai­ley, how­ever, “ASIC will not enforce the law. It has decrim­i­nalised that which par­lia­ment deemed crim­i­nal activity.”

The Reserve Bank of Aus­tralia, while not strictly a reg­u­la­tor, has sub­stan­tial polit­i­cal and eco­nomic clout. In its lat­est Finan­cial Sta­bil­ity Report, one of the risks it sees is falling asset prices may expose credit qual­ity prob­lems – in other coun­tries. The RBA con­cludes that Australia’s finan­cial sys­tem is sta­ble (just as it did before the global finan­cial cri­sis in 2008).

The Senate’s report will be an inter­est­ing read, though only time will tell how this sce­nario will play out.