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LF Economics’ Lindsay David and Philip Soos say fraud, together with a dramatic lowering of lending standards, is responsible for a massive housing bubble and threatens the stability of the entire financial system.
“The banks have trashed their lending standards over a prolonged period of time with significant evidence of banks massaging people’s incomes in their loan application forms to make them look a lot more creditworthy than what they really are, which is essentially fraud,” Mr David told the ABC's Lateline program.
“The banks would do this for various reasons. One is the highly competitive environment between the banks. Second of all is profitability.
“The safer your mortgage book looks, the lower it costs you to do business – simple as that. If you show that your borrowers are very creditworthy, then you are going to get cheaper funding costs and that's a win-win for the bank... until the whole system breaks down, obviously.”
The allegations come after the Reserve Bank of Australia said regulatory measures have reigned in risky lending.
In its Financial Stability Review, the RBA noted that the actions of the regulators since late 2014 have helped induce a tightening of bank mortgage lending standards, and housing market conditions have moderated since the previous review.
“In particular, the share of high loan-to-valuation lending has taken a noticeable step down and tighter serviceability metrics have reduced maximum loan sizes,” the RBA said.
“ADIs have also increased advertised interest rates for investor loans relative to owner-occupier loans, while providing larger discounts for some owner-occupier lending.”
According to the RBA, these developments have contributed to a moderation in the pace of investor credit growth, though the effect on growth of overall housing credit has been largely offset by a pick-up in owner-occupier lending.
“While the household debt-to-income ratio has increased a little further, mortgage buffers in offset and redraw facilities are rising strongly which helps to mitigate any associated risks.”
[Related: Banks to fund ASIC mortgage probe]