The human race has seen extraordinary advancements in the last 100 years. We have never failed to move forward, do better, strive harder…until the last decade. Take the development of the Concorde. It was developed in the 1960’s jointly by the British and the French. Released in the 1970’s and killed off in the past decade. It’s the first time passenger aircraft travel has gone backwards – in terms of speed – since Orville and Wilbur first flew the Kittyhawk.
In the world of banking we have seen similar retreats. Anything deemed to be risky is banished from an institutions suite of products. Post GFC, we’ve seen securitisation all but abandoned – even though the product itself was sound. Many banks have rid themselves of proprietary trading desks and at the other end of the spectrum 60% of small businesses are now having their credit applications rejected.
And so a few months ago we found out that a couple of our major banks had experienced fraud by some unscrupulous brokers (and their clients). It turns out that the paperwork for some offshore clients had been simply made up (this included ID, financials, payslips, even websites had been set up to convince the banks that the ruse of the identity of the borrowers). So what did our banks do? Stop lending to non-residents.
No warnings, no investigations, no telling clients that had made a financial commitment that they will see them through. In the middle of an election campaign, it smacks of expediency. However, there’s more to it.
The odd thing about stopping the lending to non-resident clients is that it assumes all non-resident borrowers are fraudulent. Some of the void is being taken up by some lenders charging up to a 5% up-front fee and a rate that’s 3% higher than the rest of us pay. This behaviour is not new. In the early 1990’s and post GFC (2009-2011) banks just stopped lending against property. Post mining boom, they stopped lending to miners. I have seen them stop lending to stockbrokers, insurers, other banks (during the GFC), infrastructure projects, strata managers…you get the picture.
In all cases the lending stops when the bank has suffered a few losses. This is nuts. By then you’re in for a penny in for a pound. It’s too late. The horse has already bolted. Surely the better course of action is to announce a temporary suspension while you investigate a better way of servicing that industry. They should’ve investigated the brokers and if there was evidence of systemic fraud handed that evidence over to the proper authorities. Which they’re probably doing now. They then should have implemented procedures that would’ve minimised the risk of this happening again. I say minimised because, fraud is almost impossible to avoid – but only if you’re not expecting it.
The banks all have staff offshore that they could use for the purposes of identification and verification of documents – or they could use embassies/consulates. They employ armies of process re-engineering consultants, surely a process could’ve been devised to minimise the risk of such fraud taking place again. I’m not complaining because we lost a lot of business. In truth, until a couple of weeks ago, we hadn’t had a single inquiry from a non-resident borrower wanting a home loan.
I suspect most other brokers have a similar story to tell. So now, we have had 40 inquiries from non-resident borrowers, who have all placed 20% deposits down to acquire an off-the-plan serviced apartments. They each have a further 30% (at least) of equity they’re willing to contribute. Their management agreement (with the manager of the building) guarantees them a yield of 7%. This means they will borrow at an LVR of 50% and don’t have to rely on their non-resident incomes. They can’t find a lender.
Compare that to a couple on a combined income of $90K. They have a 5% deposit on a home in regional NSW and have even saved enough to pay for stamp duty. With mortgage insurance they will have an effective LVR of around 97%. They walk into a major Australian bank and will be given a loan at around 3.95%. They are barely able to service their loan. The latter risk is deemed lower these days…and I’m the King of the World.