Guardian Trust Mortgage Fund's move to suspend withdrawals on Tuesday indicates panic in the sector and more mortgage funds could follow suit, say investment commentators.
Bernard Hickey of interest.co.nz estimated the New Zealand mortgage fund sector to be worth $2 billion, with $750 million worth of investor funds already frozen.
That's serious for the industry, but its not just these guys, I have a contact in one of the banks and their corporate "advice" is that every dollar they lend in NZ is a dollar less they can "invest" in China. Those parts of the bank that are not trying to put out the fires in their knickers are being pushed to higher risk to make up the losses.
Guardian Trust's mortgage fund suspension follows moves by Canterbury Mortgage Trust and the Totara First Mortgage Fund to stop investors withdrawing their cash last week.
Spooked investors were trying to recover their cash after Tower mortgage fund closed in April and a string of finance companies collapsed, Hickey said.
Guardian Trust's move to suspend withdrawals was conservative, and arguably positive for investors.
"But what it tells you is that we are seeing near panic in the mortgage fund and mortgage trust sector."
Mortgage funds or trusts became popular in the 1980s and 1990s when it was difficult to obtain a mortgage from the bank, Hickey said.
A trust fund, often administered by a lawyer and made up of inheritance investments, usually offered first mortgages on residential property.
In fact my forst mortgage ever came from such a lender because the fund had loaned the money to the original builder of the flats we bought back in 1971. We got the loan because it was obvious to anyone who looked that the lawyer had made a first mortgage that far exceeded the trustee regulations at the time and, while they wouldn't give us all the money on a first mortgage as our predecessor had, the second mortgage was at the same rate as a first; because they could not afford the alternative which MIGHT have been a complaint about their probity, not that anything was ever SAID .
Sharebroker Chris Lee of Projects Resources said the mortgage trust model had many flaws and the spate of freezes could be a good lesson for investors.
"The culture doesn't work, the model doesn't work, the liquidity doesn't work, the risk-return is not right and in my view if the result of all these freezings of mortgage trusts is that in the future the public does not use them again, that would be a good thing."
Yup, all good points, 30 years too late but good points, don't get your tail caught in that stable door.