It’s on the front page of the Financial Review. It’s on the breakfast programs. And it’s all over the web. But there are more important developments than Reserve Bank policy.
Still, investors should always keep a weather eye on the politicians, bureaucrats and economists. We’ve decided to dedicate a whole four paragraphs to them today, before getting into the really important advice we want to give you.
If you believe the media, the Reserve Bank saved Australia yesterday. The team of superheroes known as the Board lowered the cash rate. Fantastic, thank the Board. Unless you’re a saver and Australian dollar holder. Then you’re the one paying for your neighbour’s cheaper mortgage.
Of course, most banks haven’t passed on their cuts yet. Some are better at playing the price fixing game than others. The Aussie dollar hasn’t waited though. It’s down two cents against the US dollar since Thursday, half of which happened after the rate cut.
For all the fanfare and financial market shenanigans, a falling central bank interest rate is just a normal event these days. It takes money printing and mortgage purchasing on a grand scale to raise eyebrows.
Not that we want to belittle the devastating effect on savers from the RBA’s manipulation. Especially the ones who don’t know about the opportunities to escape from interest rate suppression. Dan Denning’s newly crafted The Denning Report has a comprehensive plan on just that.
Another option we’ve had some great feedback on is to simply up and leave the country. After all, we’ve got the most expensive beer and least rewarding tax system in the world. It sounds drastic to move overseas, but so does Australia’s cost of living.
Now onto something a little closer to home.
Possibly the Most Important Thing You Will Ever Read in Markets and Money
Do you have a mortgage? There is a 1 in 10 chance you have been tricked. We’re not sure if we can use the word ‘defrauded’ instead of ‘tricked’, although that was our first thought. The trick is the very same one played on borrowers in the US, Spain, and Greece.
And that turned out to be devastating, not only for the borrowers, but for the entire world economy.
There is something you can do right now to find out if you have fallen victim. It’s probably better to know now than learn the hard way later.
But first, credit where it’s due. Your editor didn’t uncover this disgusting development. Although we can claim to have suspected something of the sort. Instead, it is Denise Brailey of the Banking and Finance Consumer Support Association who has uncovered the dirty secret of the Australian lending industry.
For those of you who think you are informed about this, think again. Denise has discovered that the rot extends to the full-doc loan market, not just the no-doc loan market we wrote about previously.
For those who don’t know the story so far, we better start at the beginning. The climax of the tale, by the way, takes place when you finish this article and ring your bank three times. Hopefully that hasn’t put you off reading the explanation of why you need to do so.
The Mortgage No-Doc Loan Scandal
We wrote about it a few weeks ago. The story goes that bankers and mortgage brokers abused the lax lending standards that came with no-doc loans.
These were supposed to be for people who didn’t have the typical documentation you need to apply for a loan. Business owners, for example, don’t get a regular paycheque.
But anyone who couldn’t get a loan because their documentation showed they couldn’t afford it simply applied via the no-doc loan route instead. The banks provided an ABN to make it look like the applicant owned a business.
On top of that, they threw in imaginary income and assets and, as simple as that, the loan was approved.
What’s crucial to understand here is that this happened without the borrower knowing. They just knew they were getting the cash. And the lender knew they were getting the commission or bonus for doing so many deals.
The key to the mystery is the Loan Application Form (LAF). On it, a bank will include your financial information, and the loan is approved based on what’s on that form. If bankers and mortgage brokers add on a couple of assets after you leave their office, nobody will be the wiser. But the banker will be the richer after he gets his commission.
To be clear, the borrower is the victim here. You might feel like borrowers are getting what’s coming because they borrowed too much. That’s partially true. But you might want to make the three phone calls we suggest below before you feel self-righteous about this one.
You might not be the banks’ stereotypical victim (a 98 year old lady was given a 30 year mortgage). But you may yet find yourself caught up in the mess anyway.
Apart from that, for bankers to lend to people who can’t afford it, they had to get around their own lending standards. To do that, they fiddled with the Loan Application Forms. And that, as far as we’re concerned, is document fraud.
Legally it might not be, because the LAF is an internal document. We don’t know the legal situation.
Here’s the real question: If bankers were willing to invent income, assets and dodgy documentation for no-doc loans, were they willing to do it for full-doc loans?
The Mortgage Rot Runs Deep
Denise Brailey decided to find out. By her count, 10% of Australian full-doc loans are also infected with a dodgy Loan Application Form. That means you can probably count you, your family or your friends among the victims.
First things first, here is the warning Denise Brailey’s consumer association has put out:
DO NOT BORROW: Daily revelations show that borrowing for a mortgage in particular, is extremely hazardous to your financial well-being and you risk losing everything! Until the Australian Government initiates a ROYAL COMMISSION into the banking sector, any loan you take out with any of the 36 major banks or lenders, is most likely to be fraudulent. Loan Application Forms and Service Calculator Forms (to calculate affordability) are being doctored and changed without your consent or knowledge.
If you want to find out whether you’ve already fallen victim to the banks tactics, here’s Denise’s hard learned advice. We wanted to reveal it to subscribers of our soon-to-be launched financial newsletter, but the faster this gets out there the better.
We asked her how to get access to a Loan Application Form and here is what she wrote back, with some edits for readability:
‘Ah yes, the key question. I recommend they do not write to the bank as it gets nowhere.
‘The trick is to phone the bank customer relations service and ask for their 11 page document known as LOAN APPLICATION FORM. (Most people only signed 3 pages when they applied!)
If there is an excuse given, for example, ‘it’s an internal document’, hang up and dial again. You might have to do this three times. Eventually, one will say yes and send it.
‘We think this is due to confusion in the bank and not set instructions with staff. Collections departments are told to say NO you cannot obtain this.’
Once (or if) you do get your LAF, check the income and assets it claims you have. The bankers most commonly artificially increase your income. They’re quite shameless about it, because they figure nobody will ever check the LAF.
There is a vast amount more to this story than we can cover. For example, Denise pointed out to the Senators on the Economic References Committee that the government is currently profiting from this behaviour, as it owns a huge amount of the dodgy mortgages.
It’s also extraordinary to hear about some of the individual victims of the practice, many of them the perfect targets for predatory lending.
In America, former investment bank Bear Stearns had some internal emails released in which it called its mortgage based investment products things that would put the Bulldogs rugby league team to shame.
Using banking terminology, it’s safe to say that Australian mortgages aren’t the only ‘sack of sh*t’ in the banking industry.
You can find out more about Denise Brailey and the Banking and Financial Services Consumer Support Association here.
Let her and the Markets and Money (firstname.lastname@example.org) know about your experiences making those phone calls.
for Markets and Money
From the Archives…
28-09-2012 – Greg Canavan
Banks versus the Farms
27-09-2012 – Greg Canavan
A Familiar Sequence: Print, Spend, Crash
26-09-2012 – Bill Bonner
The Hamburglar’s Budget
25-09-2012 – Dan Denning
The Cheeseburger Police
24-09-2012 – Dan Denning