Mortgage fraud is "systemic" in Australia, with more than a quarter of recent home buyers admitting they misrepresented some information on their loan application.

Key points: 28pc of mortgage customers not completely factual in application

28pc of mortgage customers not completely factual in application One-in-20 say application was only "partially factual"

One-in-20 say application was only "partially factual" Rate of mortgage misrepresentation far higher through mortgage brokers

Rate of mortgage misrepresentation far higher through mortgage brokers 41pc of 2016 mortgage broker applicants who admitted misrepresentation said broker suggested it

The disturbing results come from a survey of 1,228 people who had taken out a mortgage over the past two years, conducted by investment bank UBS.

The key finding was that 28 per cent of people surveyed said their mortgage application was not totally factually accurate.

Of those who admitted misstating information, the bulk said their application was "mostly factual and accurate".

However, one-in-20 mortgage applicants admitted that their loan application was only "partially factual and accurate", while 2 per cent "would rather not say".

Out of the people who misrepresented parts of their application, 14 per cent said they overstated household income, 13 per cent overstated asset values, 17 per cent understated their debts, more than a quarter understated living expenses, while over 40 per cent said "other" or would not say what they had lied about.

Around 12 per cent admitted to misstating information in multiple areas of their application.

"Unfortunately survey results suggest misrepresentation is systemic with findings similar across the 2015 and 2016 vintages, price to income levels, LVR [loan-to-value ratio], owner occupiers and investors," the analysts wrote.

"However, there was a correlation between borrowers who misrepresented their application and: those whose expenditure was broadly equal to their income; stated they are under financial stress; or have missed a debt payment."

UBS added that, if anything, the survey was likely to understate the proportion of people who had fudged some part of their application.

"It is difficult to reject these findings, in our view," argued the UBS analysts.

"It is highly unlikely that the respondents would have stated they misrepresented their mortgage documentation when they were in fact truthful.

"If anything, we believe it is more likely these figures may understate the level of misrepresentation in mortgage applications as some respondents may not want to state they were less than completely accurate despite anonymity."

Mortgage misrepresentations more prevalent with brokers

While the overall proportion of people who misstated information on their loan application was high, an even greater proportion who applied through a mortgage broker misled their lenders.

Almost a third of people who got their mortgage via a broker admitted they were not "completely factual and accurate" with their details. That compared to 22 per cent who applied directly through the lender.

The rate of applicants who admitted to being only "partially factual and accurate" was twice as high among mortgage broker customers as with direct bank applications.

While only 13 per cent of loan applicants who went through a bank and had misstated their details said their banker suggested doing so, the result was vastly different for mortgage brokers.

"Of the 2016-vintage respondents who secured their mortgage via a broker and misrepresented their application, 41 per cent of them stated they had done this on the suggestion of their broker," UBS observed.

There was also evidence brokers were becoming more likely to advise clients to make misrepresentations.

"This was statistically significantly higher than the 24 per cent of respondents who had misrepresented an application on the broker's suggestion in 2015," UBS added.

Banking analyst Martin North said he was surprised to see such apparent failure in what he regards as reasonably rigorous bank checks on borrowers.

However, he also said the UBS data may explain a few trends he has noticed in his own surveys.

"I do see some worrying trends in terms of higher loan-to-income ratios than I would expect to see - in other words, people are actually getting bigger loans in terms of the income they actually tell me in my surveys they actually get," he said.

Including a tendency for looser lending standards in loans issued via mortgage brokers.

"They tend to have higher loan-to-value ratios, for example, and higher loan-to-income ratios," Mr North added.

The detailed study undertaken by UBS backs a report based on shadow shopping in western Sydney by Variant Perception's Jonathan Tepper and covered in the Financial Review earlier this year, entitled The Aussie Big Short.

UBS said this should trigger alarm bells within the banks.

"We believe banks need to tighten underwriting standards via the broker channel, even at the expense of near term market share," it warned.

Do all the little fudges matter?

UBS said it was possible that this kind of misrepresentation on mortgage applications had been going on for years with few adverse consequences.

However, the bank pointed out that housing is now more critical to Australia's banking system, household finances and economy than it has ever been before.

"Given the rapid house price inflation that has been seen in parts of Australia (especially Sydney and Melbourne), the fact mortgages now represent 62 per cent of the major banks' loan books and household debt to disposable income is now at 186 per cent, we believe that mortgage risk is more elevated than it has been previously," UBS's analysts noted.

They said that banks needed to tighten their underwriting standards and checks on borrowers' applications, especially when those come via mortgage brokers which UBS sees as a "potential area of weakness".

Many mortgage brokers are ex-bank staff who know the compliance systems in place and how to get around them.

Another concern raised by UBS was that applicants who tended to fudge their loan applications also displayed risky credit card behaviours.

"We found a number of statistically significant correlations between riskier credit activities and those who misrepresented their mortgage applications," the bank noted.

In addition, they were people who were more likely to be spending all of their income, at 36 per cent versus 25 per cent of those who were truthful.

That means this group is less likely to have a savings buffer in the event of adverse life events, such as poor health or job loss.

On the positive side, the survey found the untruthful group were more likely to have had an income increase over the past year, perhaps explaining why some were willing to stretch the truth on their current circumstances.

Complacent home buyers, banks and regulators

Another reason why people may be prepared to take the financial risk of lying in their application to borrow more money than they can potentially afford is that only 4 per cent of them expect house prices to fall over the next year.

"Mortgage applicants appear very complacent with the outlook for the housing market," UBS observed.

"This is particularly evident in New South Wales, where 99 per cent of mortgage applicants expect house prices to be flat or rise over the next 12 months, and in Victoria, where 97 per cent of mortgage applicants expect house prices to be flat or rise over the next 12 months."

When it comes to which state was the least honest, it is perhaps unsurprising, but concerning, that the state with the nation's highest home prices — New South Wales — had a much higher rate of fudging loan applications than anywhere else, with Victoria second.

The UBS research should come as a wake-up call for the Reserve Bank, which cut rates in August in part because it was increasingly comfortable with conditions in Australia's housing market, with Mr North saying it has been too complacent on housing.

"Demand, in my view, is not tailing off and, interestingly, we're seeing a very strong resurgence in the investor sector as well as the owner-occupier sector," he said.

"I think the RBA has been too soft on the housing sector, they've been using the housing sector as effectively the proxy for solving the mining slowdown, but the result of that is we have households with very, very high debts."

UBS said its survey results also raise concerning financial stability questions.



"The quality of the banks' mortgage books is unlikely to be as strong as the banks believe," UBS warned.

The investment bank also warned banks that mortgage fraud could invalidate some of the lenders' mortgage insurance (LMI) policies they believe are protecting parts of their loan book.