What to expect after the Westpac Banking Corp and ANZ Bank home loan fraud revelations

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A number of mortgage brokers have been suspended and are pending investigation following reports that two of Australia’s major banks have discovered “hundreds” of home loans in their mortgage books backed by fraudulent income documents.

According to The Australian Financial Review, Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are the two banks that have been impacted thus far. It is alleged that certain (unnamed) mortgage brokers helped to manufacture the fraudulent documents which provided false claims of foreign income, which are more difficult to verify than those with income generated locally.

Although it is disappointing that these applications were approved in the first place, investors may be relieved to learn that these loans have actually performed better than the banks’ average home loan. The AFR quoted a Westpac spokesperson as saying that many are ahead on their repayments, while they also have a lower delinquency rate than the portfolio average.

What’s more, the loans themselves are believed to make up only a fraction of a percentage of the banks’ overall mortgage books, with economists quick to assure investors that there is no material credit risk issue.

In saying that, these issues do reflect one of the concerns expressed by the Australian Prudential Regulation Authority, or APRA. In light of the low interest rate environment, it was feared that the banks could become overly competitive with one another to attain new customers, and lower their lending standards as a result. That is one of the reasons for the new regulations introduced by APRA over the last 12 months or so.

With interest rates dropping to just 1.75% last week, and expected to be cut to 1.5% possibly as early as June, this will be something that APRA will keep an even closer eye on moving forward.

Despite the reports, Westpac’s shares have actually risen marginally today, suggesting investors aren’t overly concerned about the news. Meanwhile, ANZ’s share price has dropped almost 4%, although that is almost certainly due to the fact the shares have gone ex-dividend this morning.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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