MORTGAGE fraud by brokers and banks could bring on a financial meltdown, an economic researcher has warned.

As at least three of the major banks investigate allegedly dodgy loans to Chinese buyers, LF Economics founder Lindsay David says fraudulent lending is rife in Australia’s property market — and that we should all be scared.

NAB is the latest bank to launch an investigation after receiving a tip-off about a mortgage broker involved in a new tower development in Melbourne’s Southbank.

It comes as lenders instruct brokers to stop lending to overseas borrowers, after Westpac and ANZ launched an investigation into suspect loans worth almost $1 billion.

But Mr David believes the practice of doctoring paperwork on home loans is much broader than the banks would have us think.

NAB has been told a broker used Photoshop to inflate figures on pay slips and bank statements in order to secure loans for overseas buyers.

“We are investigating these claims and will refer them to authorities if and when appropriate,” a spokeswoman for the bank told news.com.au.

It is understood that Westpac has also been contacted about the mortgage broker, but the bank declined to say whether any investigation had been launched when contacted by news.com.au.

DODGY LOANS

While the practice has long been portrayed as the work of a few bad apples in the competitive mortgage broking industry, evidence is emerging that senior banking employees themselves may be involved in mortgage fraud.

Last month, ABC business journalist Elysse Morgan revealed that her loan documents had been tampered with, telling Four Corners that she got them back from the bank to find that her income had been “massively inflated”.

“There was a line that says ‘your monthly income’, and for my husband it was correct, but for me it was inflated by around 38 per cent,” Ms Morgan said.

She said she had never found out who changed the figures on her loan application, and declined to name the bank when contacted by news.com.au.

It may sound extraordinary, but Ms Morgan is not alone. Hundreds of mum-and-dad borrowers have contacted the Banking and Finance Consumers Support Association with claims that lenders have forged their signatures on loan documents, with details of their personal income and assets bumped up by hundreds of thousands of dollars.

BFCSA President Denise Brailey says she has reported hundreds of such cases to the financial services regulator, ASIC.

Borrowers come to her for advice when they find themselves saddled with massive debts and their homes repossessed, after being sold loans that are beyond their ability to pay.

WHY IT MATTERS

When Ms Morgan saw that her income had been inflated, even though she was “on a pretty good salary”, she wondered: “What’s in the interest of the organisation or the institution to prop that up?”

“You’ve only got to think to yourself, ‘are they taking it from a double-A to a triple-A rating?” she said.

That’s exactly what Mr David believes is going on, and he warns of an impending disaster on the scale of the collapse of the United States housing bubble that sparked the global financial crisis of 2007-8.

If the banks are massaging the numbers on people’s loans to make them look more creditworthy, this would allow them to secure credit more cheaply from the institutions that lend to them.

The Australian economy relies on credit from these overseas sources to function, and the integrity of the banking system, including loanbook serviceability, is critical to the ongoing supply of capital that keeps the nation running.

Mr David believes Australia’s lending market is littered with “junk loans”, arguing that there is no way the banks’ fast-growing loan books could be entirely made up of serviceable debt.

“We think we’re just scratching the surface on this,” he said. “It’s the biggest problem facing the economy.”

Even a relatively small downturn, or a housing market collapse, could bring the whole system crashing down, he said.

“It’s quite easy to sell off your asset when it’s appreciating in value, even if you can’t pay the loan,” Mr David said.

“But when the reverse happens and you overbank what your house eventually becomes worth, that’s when real problems begin.”

He argued that Australia’s spiralling household debt — now worth more than $2 trillion, in an economy that has a GDP of just $1.6 trillion — posed a danger to the economic system, which may only be acknowledged once “the bubble bursts and causes havoc”.

And with much of Australia’s economy linked to the property market, he said, the results could be catastrophic.

“There are just too many loans out there that are simply never going to be able to be repaid,” Mr David said.

“During a real estate boom, everyone is too busy speculating and making paper profits to care about what is happening ... Only voices from the fringe see through the deception and raise concern, while the government, regulators, economics profession and the public are seemingly oblivious to the clear and present dangers.”

AN INSTANT PAY RISE

Among the documents in Ms Brailey’s files is a Westpac loan with a gross annual income allegedly inflated by a whopping $288,000.

The document forms part of LF Economics’ submission to the Parliamentary Inquiry into Penalties for White-Collar Crime, released earlier this month.

On it, the self-employed borrower, whose name is marked out for privacy reasons, has listed the alleged discrepancies: “motor vehicle — overinflated by $10,000; personal effects — overinflated by $100,000; monthly income — exaggerated by $14,500; rental income — exaggerated by $3456.

The Westpac customer also claims that the loan was written down as being for investment purposes when in fact it was their home; that its valuation was inflated by $25,000; that their listed occupation as an investment manager was incorrect, and that they owned an $85,000 share portfolio, when in fact they owned no shares at all.

Ms Brailey says she has thousands of documents on file showing similar cases.

Buyer’s agent and property commentator Catherine Cashmore also believes the problem is widespread.

“I’ve got clients it’s happened to, changes happen without them seeing,” Ms Cashmore said, disputing the banks’ line that they subject all loans to “rigorous checks”.

TIME FOR CHANGE?

With voters growing frustrated by repeated scandals in the banking sector, Prime Minister Malcolm Turnbull last month warned the institutions to lift their game.

Opposition Leader Bill Shorten has promised a Royal Commission into the sector if Labor wins the coming Federal Election, but has been light on detail about what it would cover.

ASIC, which Mr Lindsay accuses of “turning a blind eye” to mortgage fraud by banks, will soon get an extra $120 million over four years to crack down on the banking and finance sector.

Last month’s funding announcement was widely read as a move aimed at blunting Labor’s calls for a Royal Commission, which Treasurer Scott Morrison has said would “put at risk confidence in the banking system”.

None of the big four banks would provide detail of how they ensure loan application forms are accurate when contacted by news.com.au.

Westpac spokeswoman Lucy Wilson said the bank had “no tolerance for fraud”, with “systems in place to identify and thoroughly investigate any potential dishonest behaviour”.

“If fraudulent activity is discovered, we take action against those involved ... liaising with the appropriate regulator and the police as required,” she said.

An ASIC spokesman said in a statement: “If someone suspects their loan application or any similar document had been altered without their knowledge or approval, that may well involve a serious misrepresentation and a complaint should be made as soon as possible.”

In its supplementary response to the parliamentary inquiry, the regulator said dishonest or fraudulent conduct was “more commonly found in relation to mortgage and finance brokers rather than lenders”.

Since taking over regulation of consumer credit in 2010, ASIC has investigated more than 50 mortgage brokers over alleged fraud relating to home loans and personal loans, with 13 criminal charges resulting in 11 convictions, including four guilty pleas. There have been at least 38 administrative actions, which usually means bannings.

The Finance Brokers Association of Australia, for its part, claims that mortgage fraud is “limited to a small section of the industry and is definitely not systemic and entrenched”.

FBAA chief executive Peter White conceded that loan tampering was a problem, but argued the practice was “not widespread”.

“Ninety nine per cent of brokers are doing the right thing but unfortunately, like in any industry, there is a tiny element who cross the line, particularly when it comes to the repayment of loans that rely on foreign income from certain countries,” Mr White said.

dana.mccauley@news.com.au