Australia: Homeowners fight against the banks

At least someone is doing some journalism somewhere – more than I can say about the NZ media

Hope for mortgage 'victims' with homeowners winning battle against banks

THOUSANDS of struggling homeowners could walk away from their mortgages as a series of court cases helps to expose widespread improper lending practices involving some of the nation's biggest financial institutions.

The Australian,

4 June, 2012

Finance industry giants are spending millions of dollars on legal fees fighting homeowners who have successfully exited their mortgages because they were stung by sub-prime-style lending practices during the last property boom. An investigation by The Australian has revealed several mortgage providers and mortgage brokers engaged in improper lending practices in the years before the global financial crisis hit in 2008, including inflating borrowers' income and ability to repay debts to secure so-called "low-doc" loans.

Courts in several states have sided with homeowners who have defaulted on their loans, extinguishing their mortgages. The rulings have encouraged other lenders to reach settlements with borrowers that are saving homeowners hundreds of thousands of dollars. And the issue could be tested in the High Court in coming months.

Award-winning consumer advocate Denise Brailey, who runs the Banking and Finance Consumers Support Association, said she was dealing with more than 100 alleged victims of improper lending. "What this means is that if you are a struggling homeowner and the bank comes knocking you may well not have to hand over your keys," Ms Brailey said.

The declining health of loans could have ramifications for the federal government, which has put about $14 billion into securitised mortgage investments - packages of home loans known as "residential mortgage backed securities" - since the GFC.

In October 2008, Wayne Swan announced the government would invest $4bn to shore up the RMBS market, but that figure has ballooned and in April last year he increased the obligation to $20bn.

Australian Office of Financial Management chief executive Rob Nicholl said the government had invested in superior-quality loans with relatively low defaults rates and that it was "very cognisant of all the risks involved".

However, default rates among some mortgage securities, which include low-doc loans, have surged to as much as 7 per cent of loans.

According to Fitch Ratings, low-doc loans comprise about 8-10 per cent of every mortgage in the Australian securitised mortgage market.

Fitch analyst James Zanesi said that proportion of low-doc loans was similar in the wider, $1.2 trillion Australian mortgage market.

According to Fitch, low-doc loans were more than four times as likely to be in default than standard loans, with 5.5 per cent of all "prime" low-doc loans in default compared with 1.26 per cent of all standard loans.

The group said low-doc loans were experiencing "considerable deterioration" and there was "no relief in sight" for low-doc loan delinquencies.

The Australian has amassed evidence of widespread improper lending activity based around abuse of low-documentation lending products.

In the race to provide credit - and earn commissions - major lenders such as Macquarie, Suncorp and GE Money spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements.

Low-doc or "no-doc" loans were supposed to be only for self-employed business owners who could not provide standard loan information. Borrowers typically pay a higher interest rate to reflect their lack of a regular credit and income history.

But in scores of emails those lenders - and many others - told mortgage brokers that borrowers needed only to register an Australian Business Number "for one day" to secure low-doc or no-doc loans.

One email from a Macquarie Bank business development manager to brokers says: "Why not try Macquarie for the below reasons . . . No docs - Client only needs to be self-employed for 1 day or more . . . No assets and liabilities required, no income needs to be stated!!!"

Macquarie Bank and GE Money declined to comment. Suncorp spokesman Jamin Smith defended similar emails sent by Suncorp staff, saying business development managers did not have the power to authorise loans.

The Australian has also discovered cases of mortgage brokers, loan originators and others inflating borrowers' stated incomes on loan application forms without their knowledge.

Precedent-setting court cases have recently found that, where borrowers were given loans they could never afford, lenders must extinguish part or all of those mortgages. Nine judges before six courts have to date found in favour of homeowners affected by improper loan applications, and in almost all cases courts have ordered lenders to fully extinguish mortgages within 30 days.

The most clear-cut cases have occurred in NSW because of the 1980 Contracts Review Act in that state. However, courts in Victoria and Western Australia have found in favour of borrowers under existing legislation. Major mortgage securitiser First Mac - which has issued $9.5bn in Australian mortgages since 2003 - lost a NSW Supreme Court bid to repossess the family homes of three borrowers on the grounds those borrowers were victims of loan application schemes.

The judges found lenders had acted inappropriately by engaging in "asset lending" - that is, lending money based solely on the fact that the loan is secured by an asset, usually a person's home, and paying little or no regard as to whether the borrower could afford the loan.

First Mac appealed against the decision and in December the judges again sided with borrowers, ordering that mortgages against two family homes be rescinded completely, and reduced by three-quarters in a third case. First Mac was ordered to pay court costs.

In light of those judgments, lenders such as Westpac are scrambling to settle with borrowers who claim to have been wronged. In many cases, hundreds of thousands of dollars are being wiped from mortgages.

In every court case heard, lenders had failed to make simple checks, such as calling prospective borrowers to verify their stated incomes or employment status.

First Mac, based in Brisbane, has now sought to take its case to the High Court, and a hearing as to whether the case will be heard will take place later this month.

A High Court spokesman said between 8 per cent and 10 per cent of applications for such "special leave to appeal" applications were granted.

First Mac founder and managing director Kim Cannon did not respond to calls last week.

In most instances, the precedent-setting cases against the deep-pocketed financial institutions are being funded by consumer groups or lawyers working for little or no pay because the borrower victims are often close to bankruptcy. Lawyers said the vast majority of the thousands of homeowners affected by improper or unconscionable lending activities had no idea they could legally walk away from their mortgages.

"Lenders have been throwing everything they have at these cases because they know there are thousands, probably tens of thousands, of people who have been affected," said Geoff Roberson of Champion Legal, who has run the cases against First Mac. "The problem for many borrowers is they don't know they have been wronged and simply roll over when the banks come knocking."

Consumer advocates said borrowers who believed they had been affected should approach their lender for a copy of their loan application form, which they were entitled to by law, and check the income levels stated.

Ms Brailey said not being provided with a copy of the loan application form was a key indicator borrowers may have been subject to loan application irregularities.

"In every single case of the 100-plus I am dealing with, the person has not been provided with a copy of their loan application form by their mortgage broker or lender," she said.

She said borrowers were entitled to such information by law. However, banks and other lenders had "stonewalled" such requests.

"Every time the borrowers receive the forms they are blown away," Ms Brailey said. "Incomes have been grossly exaggerated, false employment job descriptions have been entered or they have been stated as being employed when they're not.

"In one case, a lowly-paid deckhand was described as a ship's captain and described as earning $150,000 a year."

Ms Brailey, who has been tracking low-doc loans and loan application issues with The Australian for several years, said she had uncovered examples of loan application irregularities in loans approved by 14 banks and other lenders.

She obtained emails illustrating imprudent lending practices by 36 banks and non-bank lenders, including all of the major banks.

"We're about to see a major train wreck," she said.