The Financial Review understands that mortgage brokers associated with the spike in fraudulent Chinese income documents have been suspended by the banks pending further investigation.

ANZ and Westpac have also informed regulators and the police.

Surprisingly, the repayment performance of the fraudulent borrowers is better than both banks' average home loan, as is their equity or security coverage.

"Our delinquency rate on foreign income loans is lower than the portfolio average, and a large proportion of these loans are ahead on repayments", Mr Lording said. "Overseas borrowers are also well-secured with the [starting] loan-to-value ratios (LVRs) on these loans 70 per cent.".

A standard Australian borrower can get much higher LVRs up to 90 per cent or more.

ANZ, Westpac have raised interest rates on interest-only loans amid looming crackdown. Nicholas Rider

ANZ's Mr Edwards said loans backed by fraudulent income documents were "performing better than the portfolio average".

The Reserve Bank of Australia says the 90-day default rates on Australian home loans are among the lowest in the developed world and a fraction of comparable arrears rates on residential mortgages in the US, Britain and Europe despite Australia's higher mortgage rates.


No credit risk issue

The AFR​'s investigation suggests the total value of ANZ and Westpac loans afflicted by fraudulent income information is likely to be less than $1 billion, or 0.12 per cent of their combined $837 billion of residential mortgages. Fewer than 0.4 per cent of these loans are more than three months behind on repayments.

Other banks, however, are likely to have been caught in the Chinese income scam.

"All our analysis to date indicates the issue is relatively small and there is no material credit risk issue involved," Mr Edwards said.

Mr Lording said Westpac had "no tolerance" for fraud. "When fraudulent activity is discovered we take action against those involved, including the broker, which normally results in termination," he said.

Rumours of the spike in Chinese frauds have run rife across the banking and broking markets and may have contributed to recent decisions by several major banks to stop lending to foreigners.

Another drawback of foreign borrowers is that they typically only have one product with the bank and are not attractive for cross-selling purposes.

Asked whether the Chinese frauds had influenced Westpac's decision to withdraw from foreign lending, Mr Lording said "while foreign income verification is more operationally difficult, the primary driver of our decision was the changes in capital and funding requirements".

Under the final Basel 3 global credit rules, banks lending to borrowers reliant on foreign income will be slugged with larger capital charges, which will reduce returns on these products. ANZ's response to these regulatory changes has been to adjust product pricing.

Last week, the RBA cut its cash rate to a record low of 1.75 per cent, which is likely to provide further momentum to Australia's already frothy housing market and intensify the affordability debate in an election year.

House price index provider RP Data says that over the three months to May 8 Australian home values have accelerated again, with annualised capital gains of more than 10 per cent.