Liquid paper and broken dreams: Homeowners brought to their knees over lending practices

Jason Hannagan had to sell his home and an investment property after a financial lender gave his family a loan they could not afford to repay.

Mr Hannagan’s family took out a $590,750 loan from a lender called Pepper Money in 2012.

He estimated the family’s monthly income was about $9,500 and their monthly expenses were about $4,000.

But their mortgage broker recorded their expenses as being just $15,600 a year, which equates to $1,300 a month.

“That’s for [a family of] five people,” Mr Hannagan, who runs his own delivery business, told 7.30.

“It’s an imaginary figure.

“The broker just told us to sign the page and we faxed it back to her and she said she’d fill out the rest.”

Mr Hannagan says they could never afford the loan.

“If the bank looked at it, they looked at what the income and the living expenses were, that doesn’t match,” he said.

“I’m no financial adviser, but I see that figure’s not true.”

After a few months the Hannagans had to sell their investment property in Sydney. Three years later they were forced to sell their family home in Brisbane.

Now they want to sue their broker.

“It’s been a very hard slog. Very hard. I have good and bad days,” Mr Hannagan said.

“Some days I just want to destroy everyone, and other days I just deal with it.”

In a statement to 7.30, Pepper Money said it applied a multiplier to the Hannagan’s expenses to make sure they could afford it.

“While the applicant provided a declared amount of living expenses in [the] application, Pepper applied a measure which meant that the figure we used was 3.5x higher than what the borrower declared,” the statement said.

“This was done to ensure that the applicant could service the proposed loan.

“In addition to reviewing business bank statements which verified the customer’s income at that time, Pepper called the customer to confirm the income figures stated in the application, type of business, loan purpose, and the ability to meet the proposed repayments.”

‘IT’S TAKEN UP ALL OUR MONEY’
Kevin Canavan ended up in a similar situation. He applied for three loans totaling $720,000 from National Australia Bank to buy an investment property.

He declared his monthly household income as nearly $9,000 and said expenses were $4,000.

“It wasn’t until months down the track, until after we signed the loan, did I see the loan application that I saw $3,500,” Mr Canavan told 7.30.

“On this loan application there is multiple, multiple mistakes. They used liquid paper. The only thing they did get right was the name and address.”

The lower expense figure meant he was $236 short every month.

“It’s been very difficult. I’ve had to sell my car and I’ve relied on family members for a bit of support,” Mr Canavan said.

“It’s taken up all our money, whatever we have at the end of the month.”

NAB told 7.30 in a statement that Mr Canavan’s applications “were assessed in line with NAB’s home-lending policies, including verification of their incomes, consideration of their expenses, and checks with credit bureaus”.

BANKS EXPECTED TO CRACK DOWN ON LENDING
Both Mr Canavan and Mr Hannigan were caught out by what’s known in banking as the Household Expenditure Measure (HEM).

It is a tool financial institutions use to calculate your monthly expenses.

It was designed to work out the bare minimum customers can survive on.

The banking royal commission has put a blowtorch on the banks for irresponsible lending.

29 per cent had not completed all minimum income verifications
86 per cent had living expenses equal to the HEM benchmark
66 per cent had no itemised living expenses collected,
In 30 per cent of the sample, the borrower’s financial position was suggested to be misrepresented;
And in 9 per cent of the sample, the loan would not have been approved if the true financial information was used in the serviceability assessment.
As a result of the royal commission JP Morgan chief economist Dr Sally Auld is expecting the banks to crack down on lending or the regulator to force them.

“It doesn’t necessarily imply that house prices will fall,” she said.

“But I think it’s a fair assumption to say that in a world where banks are tightening lending standards, house price growth will probably be slower than would otherwise be the case.”