We contributed to a segment aired last night on irresponsible lending. From ABC’s business reporter Phillip Lasker. Banks, not just customers are potentially exposed.
Investment guru Warren Buffet wasn’t commenting on the Australian mortgage market when he said, “Only when the tide goes out do you discover who has been swimming naked”, but it is no less relevant.
Key points:
- 42 per cent of home loan customers told banks they had incomes in excess of $500,000 last year
- Westpac is the first bank to face ASIC court action over irresponsible lending allegations
- Mortgage contracts can be voided if the bank provides credit to someone who cannot afford it
When interest rates start rising and/or if property prices fall, the market’s vulnerabilities will be exposed.
The prospect of higher interest rates is considered a distant threat because inflationary pressures will take time to build.
We also know households are sitting on a mountain of property debt and one false interest rate move by the RBA could trigger a collapse with far-reaching consequences.
That isn’t the only trigger.
Overstated income
The banks’ Achilles heel — irresponsible lending — is shaping up as a major threat to the banks and financial system, depending on the outcome of the banking royal commission and a low-profile battle currently being waged in courts.
“Irresponsible lending is endemic in Australia,” Digital Finance Analytics director Martin North said.
“More than 900,000 households are already in mortgage stress.
“We’re seeing a lot of households who are actually getting loans that are five, six, seven, eight, nine times income and that is astronomically high and in my mind will lead to grief later.”
Even though customers of the big four banks are representative of the Australian population, their claims about the incomes of those customers are not.
“The free and loose lending standards that banks have demonstrated, particularly over the last decade through the use of benchmarking tools and interest only loans, has the potential to be catastrophic for the Australian economy,” Maurice Blackburn lawyer Josh Mennen said.
Financial planning crisis, money laundering scandals, market manipulation … you ain’t seen nothing yet.
