Survey estimates $ 500b of debt based on false information

AUSTRALIAN banks are sitting atop $ 500 billion worth of “liar loans” given to borrowers who gave lenders false information to get a mortgage, new research suggests.

It has the potential to threaten the entire financial system as interest rates rise from current record lows, according to UBS analysts.

The latest mortgage survey carried out by the investment bank found a third of borrowers in the past year were not “completely factual and accurate” in their home loan applications.

One quarter said they were “mostly” accurate, while almost 10 per cent said they were only “partially factual” with their bank.

Mortgages sold through brokers, which account for about half of all home loans, were found to be less factual than those sold through a bank.

UBS analyst Jonathan Mott said borrowers were also finding it easier to get a mortgage approved than in previous years.

“When asked about the amount of supporting documentation and verification required, participants stated there has been no increase,” Mr Mott said.

“Given the rising level of misstatement over multiple years, we estimate there are now about $ 500 billion of fac- tually inaccurate mortgages on the banks’ books.”

There are about $ 1.6 trillion worth of mortgages held by the Australian banking system, and although the rate of loan defaults and delinquencies is low, analysts believe arrears rates are set to rise.

“Liar loans” came to prominence in the US during the global financial crisis, which was exacerbated by mortgages that had been sold with inaccurate documentation.

With household debt levels at record highs, house prices continuing to climb and income growth at its slowest pace on record, Mr Mott said the survey of 907 Australians who took a mortgage in the past year suggested borrowers were even “more stretched than the banks believe”.

“Losses in a downturn could be larger than the banks anticipate,” he said.

Responsible lending standards legally require banks to ensure they are not selling loans to borrowers who are unable to afford them.

They have increasingly fallen under scrutiny from regulators amid surging house prices and exploding levels of debt.

Australian Prudential Regulation Authority chairman Wayne Byres warned on Friday he would be intensifying focus on lending practices and would be investigating banks to see if they were overriding their lending policies.