KEY POINTS:
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.
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.
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."
Mortgage funds lend money for up to five years but tell their investors they can recover their money within a short period of time sometimes a matter of days. Investors are legally entitled to their money back when they ask for it. Lee said mortgage funds kept a certain percentage back in an account and tried to guess what the demand for repayments might be.
"They have guessed wrong this time, because in a bad market when confidence is low, basically everybody wants their money back."
He said the funds were risky because many were run by people who did not have bank management skills and they often had a lack of capital behind them and a lack of liquidity.
But investors had been encouraged to put their money into the funds by financial advisers who worked on commission for them.
Trouble in the sector is the latest effect of the property bust and Lee believed any derivative-based fund would be at risk "We've probably heard the worst from the finance companies, and I don't think the banks will be hurt. But the households of New Zealand will be."
Lee said trusts such as Guardian which were able to pay back interest and would eventually recover funds might inconvenience their investors but those with less capital behind them could lose millions of their investors' funds.
THE BIG CHILL
Mortgage funds which have suspended withdrawals
* Guardian Mortgage Trust: $249m invested.
* Canterbury Mortgage Trust: $250m invested.
* Totara First Mortgage Fund: $60m invested.
* Tower Mortgage Plus: $242m invested.
