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A senior reporter at The Australian newspaper has seized on the mortgage fraud scandal to argue that third-party loans are riskier than direct-to-bank loans and could help trigger a crash.
ASIC announced last week that two Melbourne men had been arrested for carrying out an alleged mortgage fraud involving at least 350 loans valued at $110 million across 12 lenders.
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The newspaper’s senior business reporter, Andrew Main, argued in a column that the “blurred” role of the broker and “careless bank credit processes” could help trigger a “property bust”.
“The old saying that people who ignore the lessons of history are bound to repeat it is a fair reflection on the current mortgage broker scandal and its relationship to the subprime mortgage scandal of 2007 in the US,” Mr Main said.
“Fortunately it’s not on the same scale — but that’s just good luck at the moment. What we have in both cases is the involvement of an intermediary in the vital relationship between the borrower and the lender of money used to buy property.”
Mortgages are straightforward when banks lend directly to borrowers, Mr Main said. However, “the role of the mortgage broker seems to have become blurred” in the minds of banks, he added.
Mr Main said it is clear that “some brokers appear to have taken advantage of careless bank credit processes”.
He acknowledged that there are many honest brokers, but said the third-party system can encourage and even reward unethical practices.
Brokers who exaggerate or falsify details of the borrower’s circumstances can collect a commission while arguing they have arranged a better-value loan for their client, Mr Main said.
Meanwhile, “the golden thread of responsibility for repayment of the loan can often seem to have disappeared” because the broker has no interest in whether or not the loan gets repaid, he said.
As for the banks, they don’t mind paying commissions for business coming in the door they haven’t had to chase, he added.
Mr Main said the US subprime crisis happened because that golden thread of responsibility between lending and repayment became increasingly frayed.
“Australia won’t see a property bust on anything like the scale of what happened in the US,” he said.
“But what the banks have to do very early on is review the files on those suspect loans, in very short order.”
[Related: Alleged $110m mortgage fraud may have been inevitable]
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