Blind eye to foreign money could end badly for banks

A crackdown on lending to foreign buyers has seen a number of banks pull out of the space in recent months. However, the majors have been tight-lipped since reports of mortgage fraud hit the headlines.

Speaking at an FBAA event in Sydney last month, industry veteran Steve Weston said that if he were to guess one area of the market where "a problem is most likely to happen" it would be an oversupply of apartments and their reliance on foreign money.

However, he noted that he had heard one of the major banks say that their non-resident lending portfolio performs better than its overall mortgage portfolio.

Back in May, a Westpac spokesperson told Mortgage Business that the bank had identified an issue with some loans that rely on foreign income, which it is currently investigating.

"We take any allegation of fraud very seriously. Any potential fraud is thoroughly investigated," the spokesperson said.

"This will involve contacting customers to seek further information and to verify the information they have provided in their application. We also liaise with the appropriate regulator and the police as required."

Westpac said its delinquency rate on foreign income loans is lower than the portfolio average, and a large proportion of these loans are ahead on repayments.

"Overseas borrowers are also well secured. It is important to note that LVRs on these loans are 70 per cent," the bank said.

However, the recent crackdown on non-resident lending is being driven not by any issue in servicing the debt, but rather the source of the funds to do so.

"If Chinese borrowers, for example, can only take $50,000 out of the country each year, and clearly some of the deposits are at much higher levels, the way that the whole banking sector is being challenged now to know their customers and know their source of wealth clearly is not being looked at in that example," Mr Weston said.

"We are seeing it happen all too often. Money laundering and tax evasion are all being driven by banks not knowing where the money is coming from," he said.

"What could potentially happen there is if you see Chinese regulators tighten money flows, if something should happen in the future, a question rightly could be asked of Australian banks: what research did you do to find out where that money was coming from? It won’t lead to credit losses, but it could be embarrassing for our industry."

With a handful of banks no longer accepting overseas income for home lending to foreigners, mortgage brokers targeting Asian buyers have taken imaginative steps to bring in business.

Last week, ASIC reigned in four Sydney brokerages over misleading Chinese-speaking buyers with advertisements claiming ‘no proof of income’.

ASIC said the range of concerns contained in the advertisements targeting Chinese-speaking home buyers may be false and misleading statements, or indicate a breach of the responsible lending obligations.

[Related: Investors 'doubling up' on Aussie real estate]