home Market & Economics A $500 Billion ‘Liar Loans’ Looming Threat to Financial Stability of the Country

A $500 Billion ‘Liar Loans’ Looming Threat to Financial Stability of the Country

Australia’s most respected banking analyst, Jonathan Mott from UBS is of the opinion that one-third of the borrowers who took out a mortgage in the last one year gave some false financial information to their lenders.

This lack of completely factual financial information can now threaten the entire financial system of the country. This is because the Australian banks today are sitting atop $500 billion worth of these liar loans.

An anonymous survey sample taken on 907 Australians who took loans in past 12 months indicates that only 67% gave completely accurate and factual information. The same percentage stood at 72 last year. The inaccuracies were mostly related to the overstated income and the understated living expenses to get the loans approved.

These inaccurate figures simply translate to a higher probability of default.

In a warning to his clients Mott said,

“In Australia, the average life of a mortgage is approximately four and a half years. As a result, this would imply between one-quarter to one-third of the mortgages on the banks’ books are based on factually inaccurate applications. This equates to approximately $500bn of factually incorrect mortgages (aka ‘Liar Loans’) on the Australian banks’ books or 18% of all outstanding Australian credit.”

The online survey was conducted anonymously by UBS between 7 July and 4 August and the respondents were supposed to answer some 70 questions.

This survey suggests that the risks associated with these so- called liar loans are much more than most of the banks believe.

The UBS has done a similar survey in the previous year too and all its inferences are drawn from these surveys made by it.

Source: Bloomberg 

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