Homeowners are being forced into bankruptcy over mortgage insurance policies that most consumers believe are designed to protect borrowers, it has been reported.
According to an ABC
report, bankruptcy proceedings have been filed against dozens of homeowners by mortgage insurance providers QBE
LMI and Genworth Financial over the past decade in order to recover debts from mortgage defaults.
Australian banks have made lenders mortgage insurance (LMI) compulsory for borrowers who do not have a 20 per cent deposit. Contrary to beliefs of many consumers, however, the policies are designed to protect the lender and not the borrowers in the event of mortgage default, the report said.
Australian Prudential Regulation Authority data showed that borrowers spent almost half a billion dollars on some 100,000 LMI policies in the first half of the year.
"Around 70 per cent of households believe that lenders mortgage insurance protects them rather than the lender," said Martin North, independent banking analyst, told ABC
"So it's not totally clear to them that this is something that protects the bank rather than the borrower and I personally think that there needs to be better disclosure with regard to this particular product set."
Most LMI policies provide that banks can file a claim in case of borrower default and the sale of the property does not cover the value of the mortgage, ABC
"The insurer pays the bank, so the bank gets out scot-free," Peter White, president of the Finance Brokers Association of Australia, told ABC
"But what that loss was — [the insurers] then chase the borrower to recoup.
"That could be $100,000."
In a statement, the Australian Bankers Association said borrowers were informed of the risks of LMI: "LMI would typically be discussed with customers when they initially apply for a loan, be included as part of information packs, and discussed again at the final stage when the customer proceeds to purchase."
"The terms and conditions of LMI are included in the loan contract."
Peter White from the Finance Brokers Association of Australia calls for government intervention in order to improve disclosure and borrowers’ understanding of how mortgage insurance works.
"Make it a regulated document that every banker and every broker must give to the client and the client needs to understand," White said.
"And it being at the beginning of the process maximises the opportunity of understanding."
Rating agency backs Aussie insurance product
Leading insurer has ratings affirmed