Australia could be on the precipice of a home grown sub-prime catastrophe, with dodgy deals between mortgage brokers and property developers to blame, rather than a tighter lending environment.

According to consumer advocate Denise Brailey, evidence of widespread deposit bond application fraud is emerging. Brailey, a Perth grandmother famous for her one-person crusade against the property spruiking industry, has previously warned of the effects of loan application fraud, whereby mortgagees and their brokers have fudged-up income statements to obtain home loans.

“This is an equal problem to loan application fraud and one fits the other. In order to keep the construction industry going these developers weren’t doing due diligence on general market conditions, people were being spruiked in order to get loans to put into house and land packages.”

Deposit bonds, when they are used legitimately, work to underwrite a property development and pave the way for banks to lend towards construction costs. A key component of the development process, they also serve as the initial step for a buyer to take out a mortgage and purchase a house and land package off the plan.

But depositors for new developments across Australia have, in some cases, acted as mere seat-warmers for the underwriting of projects. Many did not have the money for settlement, and some even had no intention of settling, Brailey says.

“One spruiker even paid for the deposit bond on her own credit card because the victim couldn’t even afford the cost of the $4000 bond.”

With such deposit bonds forming the collateral for developers to obtain further financing from the banks, it is no wonder that the equity and bond markets have lost so much ardour for property development companies.

Using networks like church and community groups, or old-fashioned cold calling, property developers would find thousands of depositors first to attend seminars and then to invest in “no-lose” propositions. Among those depositors were pensioners with no income, but who at least had equity in their own homes. Such equity may have provided some backup, but unless property prices kept going up there was no way for such investors to keep re-financing in order to pay the mortgage.

The game is undoubtedly an old one, but with the sharemarket in such a spin and investors afraid of the same thing happening to residential property prices, the effects of an Aussie sub-prime problem could be catastrophic not only for consumer confidence, but for the property development sector as a whole. As property demand is already flattening, the balance too is tipping.

“We’ve got to have regard for ASIC’s figure in 2006 that warned there is $80 billion worth of, ostensibly, junk property investments,” says Brailey.

“There has to be a government inquiry into the whole sector. You need to throw these people across the boot of a car, put handcuffs on them and have that on the nightly news as a warning to others that this is not tolerated in Australia.

“I feel sorry for the genuine buyers of these units, maybe 50 per cent, who can afford to settle and now face an immediate downturn with no other buyers in sight for years to come.”

Another factor is the complicity of the banks in this. With low-doc mortgages not requiring proof of income or employment the question must be asked: why commit loan or deposit fraud in the first place? The reason, says Brailey, is because the status quo was profitable.

Just like American sub-prime.