KEY POINTS:
When Guardian Trust said on Tuesday it had suspended withdrawals from its $249 million mortgage fund, it was the third mortgage fund within a week to make such a move, and the fourth since Tower's $242 million Mortgage Plus fund in April.
Between them, the four funds, including
Totara First Mortgage Fund and Canterbury Mortgage Trust, have more than $750 million in investors' funds which they are now unable to access.
Add that to what investors have tied up in failed or stricken finance companies and you reach a figure in excess of $4 billion. But is it fair to lump these mortgage funds in with the likes of Bridgecorp and Capital + Merchant Finance? The lending done by the trusts appears to be much sounder than that done by the troubled property finance companies which specialised in second or even subsequent mortgages.
Mortgage funds, which grew in popularity during the second half of the last decade when interest rates were relatively low, have generally been fairly conservative.
At that time they were "vanilla" products backed by residential mortgages that offered investors a steady but unspectacular return.
Over time, some moved away into a range of different mortgages with broader credit risks which might have offered better returns but were more exposed to the business cycle.
By and large, though, theywere superseded by the riseof the finance companies which offered higher returns. As interest rates rose, they have faced increasing competition from bank deposits.
That's why investors have been pulling money out of them. Another factor is all the bad press the property sector is now getting.
The fact that mortgage trusts don't lock investors' funds up means they were always more vulnerable to a change in investor sentiment than finance companies.
Most of these trusts operate with at least 5 per cent of their assets as cash in hand. If they receive too many redemption requests too fast, there's no way they can liquidate assets quickly enough to maintain this ratio.
Once again, as seen across the finance sector, the essential problem has been one of borrowing short and lending long.
While investors' cash in these funds is now locked up for who knows how long, at least they will still receive interest payments, which is more than can be said for clients of most crippled finance companies. Hopefully their relatively conservative lending policies will see most of their assets survive and investors will get most, if not all, of their cash back over time.
