Lindsay David, founder of LF Economics, said in The Big Rort: A Mortgage Market Built on Deceit and Fraud that the way Australian lenders measure borrowers’ ability to repay loans can be problematic for the borrowers themselves.
According to Mr David, many Australian lenders use a combined loan-to-value ratio (LVR), as opposed to an individual LVR.
The approach allows investors to effectively use the unrealised capital in a property they already own as collateral, or a substitute for a cash deposit, against the property for which they require a loan. At the same time, lenders have the ability to report the LVR as being lower than it is, he explained.
“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme.”
He continued: “Under these conditions, lenders produce guaranteed, exceptional short-term profits through a four-part strategy: extreme loan growth, high leverage, minimal loss reserves and declining underwriting standards.”
Further, he warned that a “high proportion” of Australia’s historically high household debt will “never be repaid” and argued that the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC) were culpable for their lack of regulatory enforcement.
Referring to a number of parliamentary submissions made by LF Economics inquiries into white-collar crime penalties and the banking, insurance and financial services inquiry, Mr David said there is “evidence to suggest the regulators have played a critical role in allowing mortgage control fraud to flourish “even in the face of consumer protection laws”.
Mr David explained that mortgage control fraud is the practice of lenders intentionally defrauding borrowers by lending “far in excess” of borrowers’ ability to service the loan.
He added that the practice had reached “epidemic levels, especially in direct lending to high-risk borrowers and repackaging these loans into seemingly high-quality residential mortgage-backed securities”.
Mr David went on to argue that courtesy of lenders issuing of loans against unrealised capital gains, the Australian housing market had “ballooned” and now resembled a “house of cards”.
Pointing to a lack of regulatory enforcement and a “complete disregard” to the National Consumer Protection Act, Mr David claimed that housing sector participants “have been able to create an expanding house of cards by issuing interest-only loans to owners for the purchase of either an investment property or a new home for their adult children with very little or even no cash deposit.”