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Bank Rip-Offs Revealed - Click
for Video
On 21-Apr-2003, the ABC’s 4 Corners program aired an investigation called "Tall Stories" which told the account of thousands of investors who have, and are currently falling victim to schemes to purchase over-priced investment property based upon inflated valuations and two tier marketing techniques. The extent of price inflation for properties sold this way is normally in the $10’s of thousands of dollars, with a mark-up of $50K or more not being unusual.
Whilst the program focussed upon the "seminar gurus" and the "two-tier marketeers" who run the schemes, it also pointed the finger at the major Australian banks as being heavily implicated.
As a part of the background for the story, Four Corners’ reporter Stephen McDonell interviewed three specialists for their view on the problem:
The following are summaries from those interviews where Four Corners’ reporter Stephen McDonell had asked Terry Rider, Chris Connolly and Neil Jenman on their views about the involvement of the banks (the entire interviews were not aired on the program but the transcripts from them were posted to the ABC’s website: www.abc.net.au/4corners)
Stephen
McDonell interview with Terry Ryder:
Asked how big he estimated the property rorting problem to be in Australia at present, Terry Ryder estimated that 10’s of thousands of Australians are being ripped off every year by purchasing marketeered properties at $50,000 to $60,000 above what they’re worth.
Terry Rider stated that the evidence is very strong that all the big names in Australian banking not only went along with the marketeering scams, but that they actually proactively facilitated some of them for their own profits.
He stated he thought the role of the banks was paramount in property marketeering, and that they have the power to stop the scams dead in their tracks because they will typically have their own independent valuation done prior to lending their customers the money. The problem is that they have a policy of not disclosing their valuations to their customers, despite the fact the customers are paying a fee to them for it to be done. So the banks know when a customer is paying too much for a property, but they don’t care because they just want to book the loan and increase their business.
When Stephen McDonell asked him to amplify what he meant by saying that the banks were "proactive" in this type of marketeering, he went on to add that in some scams, for example in the no-deposit first homebuyer variety, the banks even get into bed with the developers and ensure they pay, for example, 3.5% into a slush fund for every sale they make. The money in the slush fund is then there to protect the bank in case some of the buyers default, but that fee is also loaded onto the property price by the developer so it’s the buyer who’s paying
Stephen McDonell then asked why it was in the bank's financial interest to lend money for overpriced property.
Terry explained that the banks just want to write loans because they make a lot of money out of doing just that, and that as long as their back-sides are protected from any risk themselves in these scams, they’ll do it. Because most of these properties are sold to investors, they usually hold the borrower's own house as collateral in addition to the property being purchased, and they’re willing to take someone's house if needs be. In the case of the no-deposit, first-homebuyer homes, they’ve got the slush fund to fall back upon.
Asked what he thought of the fact that the banks have made no apologies for their use of these retention funds, Terry said he thought it was disgraceful on the part of the banks. This because it was indicative that they know the properties being sold are overpriced – otherwise why the need for the slush fund – and because their clients are not being told that they are in fact the one’s paying the 3% to 3.5% for the slush fund within the property purchase price.
Asked whether something could be legally done about the banks doing this, Terry said it could all be stopped very quickly by forcing the banks to not only do a true valuation for every property but to legislate in order to force them to show that valuation to their customers as well.
Asked if there was any reason why the banks currently don't show their clients the true valuation and hence inform them that they’re paying too much, he said that they don’t because if they did the clients wouldn’t proceed with the purchase and the banks wouldn’t therefore be able to book the loan.
In many cases, people are flown interstate to look at these properties, and are driven around for a weekend whirlwind tour. Most people are generally honest and are relative novices at real estate investment. Therefore, they put their trust in the professionals. If they are taken to see a banker from one of the major banks who knows all about the properties being sold and the company involved, they assume that everything must be kosher. It doesn’t occur to them to think that it might be slightly unusual that the banker just happens to be in his office on a Sunday just for them. The fact of the matter is that they’re being rewarded handsomely to be there on that Sunday and that they’re facilitating the scam.
Stephen McDonell interview with Chris Connolly:
Chris Connelly is from the Consumer Policy Centre at the University of New South Wales.
Asked by 4 Corners as to what degree he thought the banks were aware of two-tier marketing, he answered that they’ve sometimes been willing participants in it and should be doing more to stamp it out. Asked what sort of proof there is to support that the bank were "willing participants", he stated that there is now evidence being presented in a test case run by the ACCC against the Commonwealth Bank that the correct valuations were known to the bank, and that even though they knew the purchase price was $10’s of thousands of dollars higher than the valuation price, the bank continued to proceed in order to write the business. They do this despite knowing their customer will in fact suffer quite a significant financial loss because of a massive gap between the real value and the purchase price.
Asked why the banks would take this risk, Chris Connolly answered that it is because these type of purchases are usually investment properties, and therefore the banks still have recourse to the mortgage on the purchaser’s original home which generally has sufficient equity in it to cover any shortfall. Hence, there’s still a pot of money there even if the investment property is overvalued.
Tall Stories Program Feature:
Neil Jenman explained that these schemes are able to thrive because all the parties involved are in on the scheme, from the salesperson to the seminar presenter, to the solicitor, right through to the bank managers coming in on the weekend to sign them up.
As one woman stated on the program: I guess we just didn't think that we were being conned because we thought, "Well, if the bank's going to approve the loan, then it must be alright."
The ABC’s 4 Corner’s program found that there were wide-ranging allegations against the banks, including that some obtained valuations showing the investors were paying too much, yet they didn’t tell their customers this. They found that the involvement of the banks goes back a long way.
They found, for example, that ANZ, through its Origin lending division, approved loans without doing valuations. However, Westpac and its subsidiary, the Bank of Melbourne, did do valuations, and the valuers had noted upon them such things as: "The purchase price is excessive and cannot be supported by sales evidence." Yet Westpac approved loan after loan without informing their customers of this. The program revealed that the ACCC was taking the Commonwealth Bank to court for alleged misleading and deceptive conduct in two-tier marketing.
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