The government is warning about a rise in defaults on foreclosed homes in Australia’s capital cities, warning that lenders and investors could lose billions of dollars if home buyers are unable to repay their debts.

Key points:A federal government report says foreclosed properties could lose up to $5.8 billionA National Mortgage and Housing Advisory Committee has been set up to advise lenders on the riskThe Financial Conduct Authority says more than half a million people have defaulted on their mortgagesIn a report to the Treasury, the National Mortgage Insurance Advisory Committee (NMAC) has recommended that lenders should consider whether they can safely make loans to borrowers who have defaulteds on their mortgage.

The report said foreclosed property could lose more than $5 billion if lenders do not manage their portfolios correctly.

“Many banks have failed to manage their exposure to the subprime market, resulting in significant losses,” it said.

“The result is that many borrowers have taken out mortgages with inflated repayments.”

While the risk of defaulting on your mortgage is high, the risk to your credit rating and the value of your home is much less, it said in the report.

“In fact, if you default on your first mortgage, you will not lose anything because you will have paid back your mortgage within 10 years,” the report said.”[But] if you take out your second mortgage in the same month, you could be in for a financial disaster.”

The Financial Services Minister, Andrew Robb, said lenders should look at the risk as they made their mortgage applications.

“It is important that all lenders make decisions about lending based on risk and the risk is the risk they are taking, not whether they have an opportunity to get it,” he said.

He said the Government would set up a national group to advise on the issue, and urged lenders to use common sense in their lending decisions.

“I’ve been working on the report for a couple of months, I am keen to get the advice out to the people who are on their properties,” he told ABC Radio.

“We need a level playing field and we need to make sure that people who can’t afford to get their mortgage off their property are able to do so.”

The National Mortgage Advisory Committee was set up in the wake of the 2008 global financial crisis, and it has a team of experts that advises the Australian Government on mortgage matters.

The committee is chaired by former Bank of Australia chief executive John Bercow and includes representatives from financial services companies, banks and insurance companies.

The Financial Review understands the Government is looking at the report’s recommendations in order to set up an advisory group on home loans, and to look at other ways to help borrowers with outstanding debts.

But the report comes as the government has come under fire for its handling of the national housing crisis.

On Thursday, Treasurer Joe Hockey said he would seek a review of the country’s housing market after the Government announced it was going to reduce the threshold at which people can apply for mortgage relief, and said it was an area the Government had been looking at.

“This is the issue that needs to be looked at,” he was quoted as saying.

“If you are a home owner with a mortgage on your home and it is down to $10,000 or $20,000, and you’ve got a mortgage payment that you can’t repay, we have to look in to that as well.”

You can’t go into a market that’s not going to help you repay your mortgage and you’re not getting the return you are expecting.

“And the reality is, we can’t do it on our own.

We’ve got to do something that’s in the best interests of the Australian people.”

Mr Hockey said the new threshold of $10 000 would be introduced later this year.

“What we’re doing is making it easier to access and that will make it easier for people to get help to get out of that situation,” he added.

“But we also need to recognise that we have a mortgage market that is overvalued.”

Mr Robb said the Reserve Bank was considering how to respond to the issue.

“There is no question that the rate of home ownership in Australia is rising and we have got to get that back,” he tweeted.

“For the banks and the government to step in and help borrowers is absolutely vital.”

Mr Roberts said the Federal Government was also taking action to tackle the housing market.

“While it is not an easy fix, the Government has taken a number of steps, including the announcement that the Reserve bank will be launching a new mortgage-focused regulator to ensure that banks and other financial institutions comply with the law,” he wrote in a blog post.

“Additionally, the Federal Treasurer has committed to funding a national mortgage affordability scheme to help reduce the burden of foreclosures on our society.”

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