Fraud is rife in the banking system as banks systematically fudge the numbers on loan applications to make borrowers look more creditworthy than they really are, according to an explosive submission to a Senate inquiry on white collar crime.

Key points: Fraud, lower lending standards responsible for housing bubble, economists say

Fraud, lower lending standards responsible for housing bubble, economists say Submission to Senate inquiry on penalties for white collar crime

Submission to Senate inquiry on penalties for white collar crime Banks artificially boosting borrowers' income, assets "is common"

Banks artificially boosting borrowers' income, assets "is common" Form of "control fraud" that "goes to top of organisations"

The economists Lindsay David and Philip Soos argue that the practice, together with a dramatic lowering of lending standards, is responsible for a massive housing bubble and threatens the stability of the entire financial system.

"The banks have trashed their lending standards over a prolonged period of time with significant evidence of banks massaging people's incomes in their loan application forms to make them look a lot more creditworthy than what they really are, which is essentially fraud," Lindsay David of LF Economics told the ABC's Lateline program.

"The banks would do this for various reasons. One is the highly competitive environment between the banks. Second of all is profitability.

"The safer your mortgage book looks, the lower it costs you to do business — simple as that. If you show that your borrowers are very creditworthy then you are going to get cheaper funding costs, and that's a win-win for the bank — until the whole system breaks down, obviously."

But at some stage, they argue, an economic shock will expose the decline in lending standards and cause a loss of confidence in international markets, undermining Australian banks' access to the cheap offshore funds they rely on to maintain their lending.

"I don't think that Australians realise the risks the banks have taken in order to get house prices as high as they are," Mr David said.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 7 minutes 26 seconds 7 m Watch Stephen Long's report

The submission to a Senate inquiry on penalties for white collar crime will be publicly released next week.

Their analysis draws on the work of criminologist and consumer activist Denise Brailey, who has received and examined more than 2,000 loan applications and related documents from aggrieved bank customers.

"We see incomes exaggerated, that's extremely common. We see signatures forged," said Ms Brailey, who runs the Banking and Finance Consumers Support Association.

"In all cases," she said, "[the loans are] unaffordable, unsustainable and unverified."

Have you had loan documents altered? Do you know more about this story? Email investigations@abc.net.au

Jeff Morris, the whistleblower who exposed the Commonwealth Bank financial planning scandal that led to calls for a Royal Commission into financial services, also believes that the practice of banks artificially boosting borrowers' income and assets in order to make loans is common.

"You've got [mortgage] brokers and lenders, who are remunerated on the number of loans they write, simply massaging the figures to put it through the computer system, and then it spits out an approval," he said.

Lenders under pressure to meet sales targets: whistleblower

Australia has the highest levels of household debt in the world and residential property prices have continued to soar despite the lowest wages growth on record.

"The banks employ lenders who are bonused on the number of loans they write. They put them under enormous pressure to meet sales targets so if they don't meet their targets, they'll be sacked," he said.

But Mr David and Mr Soos argue that it is not merely a matter of individual loan officers inflating figures to make loans and meet targets.

They describe it as a form of "control fraud" that goes to the top of organisations.

They argue bank executives have a direct interest in exaggerating the credit worthiness of loans in order to secure cheap funding.

The economists also argue that it not possible that banks could have maintained credit quality while property prices have soared relative to incomes.

Bank executives deny that there is any problem with loan quality or lending standards, pointing to the very low proportion of borrowers who fail to meet loan repayments, and a large share of borrowers who are ahead on their mortgage payments.