UBS: Liar Loans Surge in Australia’s Housing Bubble, Pose Risk to Big Four Banks, “Financial Stability”

“Misrepresentation is systemic.”

UBS Securities Australia reported today that about 28% of Australian mortgages issued in 2015 and 2016 are what we in the US have come to call “liar loans,” which played a big role in the housing boom and the collapse and subsequent bailout of the global financial system.

The last phase of a housing bubble needs liar loans to keep going because buyers have to reach beyond their limits, and the only way to do this is lie now, or miss out forever on buying a house to live in or get rich with quick as investor.

Evidence that home buyers are lying about income, assets, expenses, and other things on their mortgage applications has been surfacing for a while, along with fears that this would eventually lead to a “Mortgage Meltdown.” The US-style mortgage fraud would be a “Nuclear Bomb” to Australia’s banks. Hedge funds are betting on this meltdown by shorting the big four banks.

But everyone else wants these bank stocks that dominate the Australian stock exchange to rise. They’re in everyone’s portfolio. And they’re all doing what they can to turn shorting the banks into a widow-maker trade.

To get “hard evidence,” UBS Securities Australia and UBS Evidence Lab surveyed 1,228 Australians who’d taken out a residential mortgage in 2015 or 2016. Participants, who remained anonymous, were asked 63 questions.

The survey was broad based, covering all states and territories in Australia. Given the size of the sample and broad spread of respondents we believe the results are representative of Australian mortgage borrowers. Conclusions based on the total sample have a potential sampling error of just ±2.71% at a 95% confidence level.

The resulting report, “Mortgages – Time for the Truth?” found that 28% of the respondents admitted that they’d lied on their mortgage application:

  • 21% claimed their applications were “mostly factual and accurate.”
  • 5% stated they were “partially factual and accurate”
  • 2% “would rather not say.”

How many of these liar-loan applicants lied on the survey to hide their lies on the mortgage application? We don’t know. But the actual percentage of liar loans could even be higher, given the propensity of liar-loan applicants – just my hunch – to lie on surveys to cover their tracks.

And it gets worse: 32% of respondents who’d obtained a mortgage through a mortgage broker admitted they misrepresented some element of their application. That’s nearly a third!

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).

That’s up from 24% in 2015! Brokers are getting more aggressive in pushing liar loans as the advancing housing bubble requires ever more finesse to be taken to the next level so that everyone can profit from it for as long as possible, before the whole construct collapses.

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.