| It’s now public knowledge that Aussie banks and mortgage brokers routinely edited people’s loan applications to make them look more creditworthy. To get their loans past lending standards, however unaffordable they may be. This isn’t unusual. But here’s what Australia’s courts did differently. The borrowers who caught the banks manipulating their applications managed to cancel their loans and keep their homes. Read that again slowly. If I wasn’t a licensed financial adviser, I’d be allowed to call it a free house. The problem is, this leaves the banks having to book the whole loss. Not just the usual loss of a defaulting borrower and a house repossessed at negative equity. We’re talking the entire value of the loan, with no access to collateral. That’s a loss several orders of magnitude larger than what American banks suffered in 2007. The question is how common the manipulation was. And even after a Royal Commission investigation, we still don’t know. They carefully avoided asking that particular question. Because the Commissioner and I both know that the practice was common enough to sink the entire Aussie banking system overnight, if the law was upheld. It must remain a secret. The cover-up has been quite effective. But it’s not perfect. Gradually, the secret subprime crisis is leaking out anyway. And that’s what is undermining the economy. The Australian Financial Review has this to kick us off: ‘Ten per cent of property borrowers using a mortgage broker to arrange their loan are struggling to meet repayments within 12 months, with many missing at least one repayment, according to an ASIC review of mortgage brokers and home lending.’ Brokers originate 60% of loans, so about 6% of Aussie mortgage borrowers get into trouble within 12 months… After that, it only goes up. That’s no big deal if your house price has gone up in the meantime. By the time they sold their home, even people who couldn’t afford their mortgage had been making profits. And the bank had no risk, even when a borrower defaulted, because the collateral was rising in value. But that was past tense. House prices stopped rising a few years ago. In two of our capital cities, they’re down 40%. And so now mortgage defaults are actually showing up as defaults, instead of forced but profitable property sales, with the subsequent financial carnage too. The ABC reports, ‘“We’ve never seen it as bad as it is”: Researchers warn of rising mortgage stress’. The regulator is finally on the case too. After having stopped me from publishing my report on what was going on in the Aussie housing market about five years ago, it’s actually doing its job now. Again, the AFR has the extraordinary details: ‘National Australia Bank will face claims it used hairdressers and gym instructors to illegally reel in borrowers who could not afford to repay loans when it becomes the first bank to be taken to court by the corporate regulator in the wake of the Hayne royal commission. ‘NAB’s introducer program was savaged at the Hayne royal commission when it was revealed the scheme was being rorted by a fraud ring operating out of a western Sydney [bank] where bank employees were accepting brown paper bags of cash over the counter. ‘In the first legal case against a major bank since the royal commission’s final report was published in February, the Australian Securities and Investments Commission will allege 297 loans were subject to fraud and breaches of the National Consumer and Credit Act.’ This is just the first of many similar cases, focusing on a small group of the suspected total. Just 16 bankers and 25 introducers. And yet, NAB faces a maximum fine of $512 million already… KPMG ran an analysis of the introducer program’s affected loan book in 2015: ‘Fifty per cent of the loans outstanding may have potential issues with ongoing serviceability ... we recommend that this analysis is extended to a wider population of introducers and that a review of the underlying securities is performed.’ Believe it or not, they kept the program going! A further 50 court cases are in the works, according to the regulator. And after a public humiliation in the Royal Commission, the regulator has promised to stop secret settlements outside of court. Meanwhile, hundreds of thousands of Australians could join class actions against the banks. One is already underway. Remember, the precedent allows them to cancel their loan and keep their home. After years of being rescued by a Chinese resource demand boom, the Aussie economy is finally reflecting the housing bubble chaos. Residential approvals hit levels from before I was born, which is expected to rout the jobs market soon. In the year to July 2019, house approvals were down 16.6% and unit approvals by 44.2%, seasonally adjusted. Housing credit growth is at financial crisis levels. Property sales are at lows going back to the 90s. Construction declined for the last four consecutive quarters. Developers are going bust. The university which prevented me from revealing dodgy banking practices (before the Royal Commission was even announced) is now reporting that mortgage debt isn’t just a problem for the middle aged: ‘Mortgage debt for older Australians has blown out to more than $185,000 from $27,000. ‘That’s an increase of a massive 600 per cent between 1987 and 2015 for people aged over 55. ‘Research from the Australian Housing and Urban Research Institute revealed the group’s average mortgage debt to income ratios tripled from 71 to 211 per cent over the same period.’ That’s from News.com.au. A bursting housing bubble will destroy many people’s financial position and they will struggle to recover. And what about those who own poorly constructed apartments? Digital Finance Analytics Principal Martin North has done the maths on what it could cost to fix up Australia’s deficient apartments: ‘This could be many billions, even a trillion dollars, worth of damage if you take the value collapse as well [as the actual] cost of repair. We need to understand that this is going to be a very important issue over a long period of time.’ As I look out the window of my flat in London, I can see the flammable cladding of hundreds of apartments being replaced. At a huge cost. The cladding in my building is already gone, but no bank will lend us the money to buy it. Because nobody knows who will pay the cost of having the cladding removed. Until then, the flat is effectively worth nothing. But here’s my key message to you today. Something new. The rats are making their move now, jumping off the sinking ship. Australia’s investment bankers had established and invested in so-called ‘non-bank lenders’, which are especially notorious for fudging loan documentation figures, according to my own research. Now the owners are trying to offload the time bombs, according to The Australian: ‘KKR & Co, Varde Partners and Deutsche Bank are likely to be first cabs off the rank with $5 billion Latitude Financial, which they have held for about four years. ‘This column understands the trio are targeting an initial public offering deal roadshow to present to fund managers next month, followed by a listing by year’s end. ‘…Latitude probably will be followed on to the ASX next year by Pepper Australia, owned by KKR Credit Advisors. Citigroup, Macquarie Capital and KKR Capital Markets are said to be front and centre to work on that float. ‘…Investment bankers are also hoping that La Trobe Financial, which has a loan book of about $9bn, joins the IPO pipeline next year.’ Rats off a sinking ship, looking for gullible buyers. This means Australia’s economic turmoil has barely begun. You’ll know when it’s over. When I move back home. | Until next time, |  | | Nick Hubble,
For The Daily Reckoning Australia |
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