More than $1 billion has been frozen in mortgage trusts after AXA New Zealand yesterday locked up three of its funds.
AXA said the suspensions were because of confusion over who will be covered by the Government's deposit guarantee scheme and fears that investors will take money out if it is not guaranteed.
The funds have a combined value of $225 million from about 5000 investors.
Fund managers in Australia have frozen 13 of the country's 20 largest funds to stop investors pulling their money out and putting it in Government-guaranteed bank deposits.
More than A$20 billion is thought to have been locked in the Australian funds, affecting 100,000 investors.
Fund management firms have urged the Australian Government to extend its scheme to mortgage funds, but despite the carnage in the industry there has been no talk of change.
And there is no sign of the New Zealand Government coming to the rescue of investors either.
A Treasury spokeswoman said it appeared that mortgage trusts would not be covered "on the basis that the whole purpose is to cover bank deposits".
The head of managed fund research firm FundSource, Yvonne Davie, said other fund managers could take the same steps as AXA.
"In July we put a hold on the entire sector because we could see this sort of event happening. The deposit guarantee scheme was not there then but we could see they [mortgage funds] were being affected by the credit crunch."
Five of New Zealand's largest mortgage funds have stopped about 16,000 investors taking money out after a run on withdrawals as investors fled after a series of finance company collapses.
Ms Davie said the deposit guarantee scheme could have a huge influence on investors' behaviour.
"Confidence has been knocked so much they will look for safe havens."
Stockbroker and industry commentator Chris Lee said it spelled the end of the mortgage fund industry, worth about $2 billion.
Mr Lee said the main attraction of the funds had been the ability for investors to get their money out when they wanted to.
"The moment you freeze it, you demonstrate the falseness of that advantage."
Mr Lee said he could not see any reason someone would put money in a mortgage fund rather than into investments guaranteed by the Government's bank deposit scheme.
Mortgage funds should not be included in the Government's deposit guarantee.
"They don't have any capital of their own. The money is not put in for a set rate for a set time. To compare them with banks or finance companies ... they are totally different."
It would be outrageous for the Government to guarantee any market-related funds, such as mortgage funds.
But AXA New Zealand chief executive Ralph Stewart said mortgage funds carried out similar lending to finance companies, which were covered under the scheme.
Mr Stewart said he wrote to the Reserve Bank over the weekend notifying it of its move to suspend redemptions on its Mortgage Distribution Fund, Mortgage Investment Fund and AXA Investment Portfolio for the next 30 days.
He said the investments were not in trouble and the freeze was to protect investors and ensure all were treated fairly.
AXA had already frozen its $320 million Mortgage Backed Bond fund following freezes of the $249 million Guardian Mortgage Fund, $250 million Canterbury Mortgage Trust fund and $60 million Totara First Mortgage fund in July. Tower closed its $242 million Mortgage Plus fund in April.
Louise Edwards, chief executive of Perpetual Trustees, manager of the biggest non-bank mortgage fund which remains unfrozen, said it was monitoring the situation and was hoping the Government would change its mind. "There have been so many changes over the last week. We are hopeful they will give it consideration."By Tamsyn Parker Email Tamsyn