Top lawyer dismisses 'bubble' talk as ‘extraordinarily dangerous’
One of the mortgage industry’s most respected lawyers has spoken out about recent media reports on rampant mortgage fraud and an Australian property bubble.
Gadens partner Jon Denovan told Sterling Publishing that recent reports in the Australian Financial Review about loan applicants being told to lie about their income and the collapse of the housing market were “extraordinarily dangerous” and “sensationalist journalism at its worst”.
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The leading financial services lawyer referred to a news article that appeared on the front page of Wednesday’s AFR, titled 'Uncovering the big Aussie short'.
The newspaper reported that hedge fund manager John Hempton and economist Jonathan Tepper posed as a gay couple with a combined income of $125,000, viewing housing developments and meeting mortgage brokers in Sydney’s outer suburbs.
“What they discovered repeatedly was that mortgage brokers were advising them to lie on loan application documents about the deposit for a house and about income,” the AFR reported.
Mr Tepper told the AFR that “Australia now has one of the biggest housing bubbles in history”.
However, according to Mr Denovan, the alleged fraud would have nothing to do with a bubble because the bank is still getting its valuation.
“It’s just that some people, if there was broker fraud, are getting put into loans which they can’t afford, which is bad stuff, but that doesn’t cause a bubble,” he said, noting that the AFR ran follow-up stories in yesterday’s paper about the issue.
“It’s extraordinary. In yesterday’s paper they put about three pages into it.”
Commenting on reports of broker behaviour, Mr Denovan said no serious mortgage volumes are being written except through the big aggregators, which have “good checks and balances” and high standards among their brokers.
“At the same time, the banks are reviewing loans more carefully than they used to because the regulators have been on their back,” he said. “There has always been fraud, but to suggest that fraud could be on a level to create a housing bubble, it’s not possible.”
Much of the hysteria this week has referenced The Big Short, a newly released Hollywood film that explores the US sub-prime mortgage crisis.
“What happened in America wasn’t to do with fraud,” Mr Denovan said, “it was about responsible lending requirements and no personal recourse. It’s completely different.”
Earlier this week, Ben Kingsley, chair of Property Investment Professionals of Australia and director of Empower Wealth told The Smart Property Investment Show that Mr Tepper's comparisons between the Australian market and those of other countries were largely redundant.
“How did we get through the GFC? Well, we didn’t do stupid things like lend people who are unemployed money. Like in America, you could get money, because what happens is your servicing calculator is based on a certain level of servicing, so depending what your income is, if you had $30,000 you could borrow $600,000 in America. That’s crazy stuff.
“Whereas right through, before the GFC and even with lower interest rates, we set our assessment rates at as low as 6.5 per cent – that was as low as it got. So even though interest rates came in lower, we didn’t adjust that servicing ratio and then that borrowing capacity didn’t explode like it did in, let me guess, Ireland, Spain, the US, those types of places,” Mr Kingsley said.
Mr Kingsley was talking after Mr Tepper's appearance on a 60 Minutes segment broadcast on Sunday night, which also featured the struggling mining town of Moranbah.
Hear more of Mr Kingsley's comments on the latest episode of The Smart Property Investment Show.
