Aussie banks hold $500bn in ‘liar loans’: UBS

A UBS Evidence Lab report released this week, authored by UBS analyst Jonathan Mott, explains that the state of Australian bank mortgage books is “worse than believed”.

UBS Evidence Lab surveyed 907 Australians who took out a mortgage in the last 12 months and found that 67 per cent stated that their mortgage application was “completely factual and accurate” in 2017, down from 72 per cent last year.

Only 25 per cent of participants in this year’s survey said that their application was “mostly factual and accurate”.

“Given the rising level of misstatement over multiple years, we estimate there are now ~$500bn of inaccurate mortgages on bank books,” the report said. It labelled the inaccurate mortgages Liar Loans and explained it is “a term used in the US during the financial crisis for mortgages where documentation was not accurate”.

If the $500 billion figure is to be believed, then approximately 30 per cent of home loans in the financial system are based in inaccurate information. This is based on ABS figures, which show that at the end of July, the value of outstanding housing loans by ADIs was $1.613 billion.

“While household debt levels, elevated house prices and subdued income growth are well known, these findings suggest [that] mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate,” the report said.

ANZ’s level of application factual accuracy (55 per cent) was statistically significantly lower than the industry (67 per cent) this year.

NAB saw a fall in “completely factual and accurate” mortgage applications in 2017 to 62 per cent, while CBA has seen the quality of its mortgage applications deteriorate over the last three years. However, UBS stated that “this deterioration was not statistically significant, nor was the difference between CBA customer responses and the survey total”.

UBS said that it is underweight Australian banks and “very cautious” about the medium-term outlook.

Fudging the numbers

The survey found that 30 per cent of respondents admitted they under-represented their living costs (up from 27 per cent in 2016 and 23 per cent in 2015) while 15 per cent over-represented their income.

There was little change (16 per cent and 15 per cent, respectively) in the number of respondents who over-declared other assets and under-represented other loans or commitments.

UBS noted that the percentage of customers who understated living expenses was consistent across distribution channels.

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