Lending practices by Australia's big banks are again in the spotlight after admissions by Westpac and ANZ they approved home loans based on fraudulent documents.

Key points: Home loans approved based on false documents relating to overseas income

Home loans approved based on false documents relating to overseas income Westpac and ANZ likely not alone in the practice, expert says

Westpac and ANZ likely not alone in the practice, expert says Banks say credit risk is low, as delinquency rate on foreign income loans is lower than average

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 4 minutes 47 seconds 4 m 47 s Banks admit approving loans based on fraudulent foreign income information ( Emily Bourke ) Download 8.8 MB

The banks lent money to Australian residents based on income customers supposedly earned overseas.

The fraudulent practices were revealed as a result of internal investigations, and the banks have also alerted police and the financial regulator, ASIC.

Lindsay David from LF Economics said he was not surprised, and thinks that the state of the Australian housing market contributed to the practice.

"House prices are as high as they are because the banks have been lending what can only be described as irrational sums of debt to home buyers," Mr David said.

"One of the ways to get people the debt that they need to buy these very expensive properties in Australia — whether they're local or from abroad — is to make people look a lot more credit-worthy than they really are."

'Westpac and ANZ likely not alone'

Mr David said Westpac and ANZ were likely not alone in the practice. Last week, he made a submission to a senate economics committee about the issue.

"We found evidence of 21 Australian lending institutions with evidence of people's loan application form being fudged," he said.

"Not as much by the borrower or the mortgage broker but directly from the bank, where the bank has actually been doing the number fudging to make people look more credit-worthy than they really are.

"But in saying that, there would be a lot of instances where you find that the actual borrower thought they might be able to get away with fudging their loan application forms."

'Real impact only revealed when housing market slows'

The banks say the delinquency rate on foreign income loans is lower than the portfolio average and that there is no evidence of defaults at this stage.

But Mr David said that makes the problem of possible fraud even more worrying.

"It actually means it's greater of an issue, funnily enough," he said.

"If you look at the Irish example back 10 years ago, as house prices were skyrocketing, [it is] near impossible to default on your loan when you're able to offload your asset that you borrowed against at a much higher price than you originally paid for it."

He said the real impact was revealed once the housing market slowed.

"As we see in a whole host of mining towns where mortgage fraud was also very evident, as the market deteriorated, it's only then you see the real impact of dodgy lending standards, whether it be bank induced or borrower induced."

Banks reviewing brokers who manufactured fake documents

The banks say the issue affects a small percentage of borrowers but they were still reviewing several mortgage brokers who manufactured fake Chinese income documents.

Martin North from Digital Finance Analytics said the large volume of mortgages being written at the moment meant there was always a risk of fraudulent activity.

"The fact that it's specifically related to foreign applicants also doesn't surprise me," Mr North said.

"Of course, there's actually a complication there with regard to translation and also the fact that it's quite feasible for borrowers, mortgage brokers and even perhaps solicitors to collude essentially to defraud the banks."

Despite recent moves by the banks to clamp down on some foreign investor lending, Mr North said there was room for tighter controls.

"We just have to be a little bit more cautious about the way that the information flows work and the way the checks and balances work," he said.