Investing in mortgages grows in popularity

By Bob Dey

A mortgage investment trust formed to replace solicitors' nominee companies in Auckland has lent $10 million on 40 properties in its first six weeks.

The concept, introduced by Dunedin lawyers five years ago, was established in Tauranga three years ago and a Christchurch trust will start trading in a few weeks. The Dunedin and Tauranga operations have built up mortgage pools totalling $70 million.

Solicitors looked at changing their nominee company and trust operations after heavy losses through fraud at the Lower Hutt firm of Renshaw Edwards forced every lawyer in the country to cough up large sums to support their fidelity fund.

That event came on the tail of a series of collapses by contributory mortgage companies. Two of those, RSL and Landbase, collapsed in 1988 with about $175 million of investors' money lent to borrowers who, in a falling property market, were unable to make interest payments or repay loans.

Exhaustive court hearings followed to determine how returns to investors should be dealt with in liquidating those companies - as pooled funds, so all investors got the same proportion back, or as loans tied to individual mortgages.

Auckland Mortgage Trust's general manager, Bruce Rasmussen, is quick to point out that Auckland Mortgage Trust pools its funds for lending secured over properties and does not provide contributory mortgages, although that kind of loan is increasing in popularity and is being offered by some fund managers.

The original Fund Managers Otago was established by lawyers at Anderson Lloyd and Webb Farry, who are also partners in the Auckland manager along with some partners in Hesketh Henry and all the partners in Cairns Slane.

Rasmussen says the 80s contributory mortgage and fidelity fund losses were part of the reason for solicitors moving away from having their own nominee companies. Another was the inflexibility of the nominee company regulations.

The trust is more flexible in the loans it can offer and Rasmussen says lawyers are starting to move money out of trust accounts as a result. He says the trust is negotiating with two more Auckland firms to switch their nominee money over and has begun preliminary negotiations with another six firms.

"Their security is increased because through the nominee company they were contributing on the basis of one part of a mortgage. Now an investor invests on the basis of $1 units, that money is pooled and therefore the risk is shared across the whole pool. We have a 0.1 per cent reserve fund and the value of the securities is 52 per cent of land valuation."

One handicap to growth of the trust system, however, is the full 33 per cent tax rate applied to its earnings, which makes it a poor option for taxpayers who pay a lower rate, and particularly tax-exempt charitable trusts.

Contributory mortgage lenders of the 80s were very much lenders of last resort, charging high interest rates based on higher risk.

The lawyers' trust has lending limits - 80 per cent on residential, 50 per cent on farms, 66.7 per cent on commercial and no more than 5 per cent of its funds lent on one mortgage or to one borrower. There is also a limit of 15 per cent of its funds going on second mortgages.