Ms Brailey said she had seen 452 of these loans since 2010.

"Australian law stipulates a mortgage must be approved on the basis of the borrower's ability to finance the principal and interest payments out of income, preventing banks from lending against the value of the home as the only form of collateral," LF Economics's submission said.

"This has not prevented lenders, however, from approving mortgages based on the equity in the owner-occupied home."

ASIC said it had been active in its management of these loans, also known as "low doc" or "no doc" loans. "ASIC identified loans promoted as 'low doc' as an immediate priority area for review at the commencement of the responsible lending obligations," ASIC said in its supplementary response to the inquiry.

"Low doc loans in the sense previously common in the market, where the lender does minimal verification of the borrower's financial position, are now prohibited under the responsible lending laws. ASIC has made that very clear to industry."

Ponzi and predatory finance combined

"This law explains the incentive lenders are faced with to inflate assets and incomes to ensure mortgages are approved ... naturally, this arrangement is unsustainable as borrowers inevitably require additional loans to pay down the principal and interest on the earlier loan – essentially Ponzi and predatory finance combined."

"Low doc" or "no doc" loans in Australia, have declined since the global financial crisis, and now constitute only 0.4 per cent of new mortgages issued, according to the latest update by APRA.


But Ms Brailey said she had received new complaints during the recent boom from 2012 to 2015, with many borrowers being spruiked loans to buy investment apartments, leading to concerns that the residential lending environment in Australia might be loosening.

Numerous controls

LF Economics also included in its submissions copies of two "altered" mortgage application forms which it said had exaggerated borrowers' income, over-inflated assets and included incorrect valuation numbers.

One of the lenders, Bendigo and Adelaide Bank, responded to LF Economics' submission, rejecting allegations that "Adelaide Bank credit assessors or officers illegally borrower details in loan application forms".

"The Bank maintains numerous controls within its loan application process to review the credit quality of a random sample of loan approvals by its credit approvers and assessors," it said in an official response to the inquiry.

The other lender, Westpac Bank, did not respond by deadline.

LF Economics added that even if interest rates did not move higher, the housing market could still "crash".

"You don't need interest rates to move higher to see house prices fall," Mr David said.

"As very long-term housing price indexes have shown in Australia and elsewhere, prices move in cyclical patterns regardless of what interest rates are doing."

The Reserve Bank cut the overnight cash rate to 1.75 per cent on Tuesday.