Overstated borrowers’ income is raising the risk of mortgage mis-selling and such misconduct poses material risk to banks, said UBS analysts as they expressed concern over the “weak” mortgage underwriting standards of banks.
In a research note, the analysts said their findings regarding high levels of mortgage borrowers' gross household income – as reported by major Australian banks – support their concerns over factually inaccurate mortgage applications that are “permeating” the country.
They called these high levels of income as “highly improbable” and said they do not add up across the economy.
The analysts are referring to the data on mortgage borrowers' gross income that CBA, NAB and Westpac have begun disclosing over the last two years. The data shows an average gross household income for owner occupied borrowers of $208,000 and investment property borrowers of $236,000.
“In isolation these numbers appear high. However, when we aggregate this across the 950,000 mortgages written last year, material contradictions become apparent,” said analysts Jonathan Mott and Rachel Bentvelzen.
Benchmarking the figures from the banks against the Australian population using Census, Household Income & Wealth Survey and Tax Office data, they found that the population data shows much lower household income levels and fewer very high income earners.
The analysts said the banks' disclosures imply that approximately 42% of all households with income of more than $500,000 must have taken out a mortgage in 2017, and that about 27% of all households with income of $200,000-500,000 also leveraged into a property over the past year.
“We remain concerned with mortgage underwriting standards in Australia. We believe that responsible lending and mortgage mis-selling are material risks for the banks,” said the analysts.
They noted that the inclusion of mortgage brokers and intermediaries in the royal banking commission indicates the commission will likely focus on misconduct in the mortgage market.
“We see this as a material risk given the size of the mortgage market at $1.7 trillion,” they said.
While there is always room for improvement both in the collection and reporting of borrower information, the industry has evolved and improved dramatically over the years, said Mortgage Choice CEO John Flavell.
"Twenty years ago, a home loan application was a single sheet of paper and the level of data that was collected by a lender was scant. Only 10 years ago, approximately 50% of all home loan applications in Australia required borrowers to certify their income and their asset position," he said.
"When you contrast these lending practices with what we have today, it is fair to say things have come a long way."
Flavell emphasised that borrowers are not being forced into higher loans -- they are simply choosing to borrow more to buy their desired assets.
Responding to Mott and Bentvelzen's call that APRA give further focus on overstated gross household income, FBAA executive director Peter White said APRA needs to do what it believes it needs to do.
"Brokers (in the main) unquestionably do the right thing. Big questions, however, hover over bank branches where brokers decline loans, yet the branch writes them," he said.
As to the analysts' suggestion that borrowers be required to provide their tax file numbers to address the risks of overstating their income, White said the validation process is significantly rigorous.
"And there are huge legal and privacy issues with providing TFNs, so that’s not the answer to what may be a 'non-existant' problem."
The analysts said that given the findings of their report, they do not believe the current income validation processes in Australia are sufficient.
However, Flavell said new legislation already requires brokers and lenders to forensically examine a borrower’s assets and liability situation. Brokers and lenders also need to verify a borrower’s employment through documentation as well as telephone checks and discussions with employers.
"At the end of the day, nobody -- lender or mortgage broker -- wants a consumer to be in a situation where they access credit they can't afford," said Flavell.
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