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An investment adviser believes more mortgage funds will be forced to freeze redemptions and shut up shop if overdue loans begin to creep up in the face of tightening economic conditions and a falling property market.
On Wednesday Tower announced it would close a $242 million Tower Mortgage Plus fund because it was having to increase bad debt provisioning to cover more loan arrears and could no longer compete with the banks on investment returns.
Of its 450 residential and commercial mortgages 9.1 per cent were more than one month in arrears.
Kapiti Coast sharebroker Chris Lee said the low returns from mortgage funds meant they were no longer competitive with bank deposits in the current high interest market and he expected many in the industry to be reconsidering their options in light of Tower's decision.
Lee said the funds were unlikely to be getting much money in the way of new investors which could create problems if existing investors decided to pull out.
"There is a big liquidity issue."
Lee said many of the funds also had exposure to property development which was coming under increasing pressure in the falling market.
"They [mortgage trusts] only work when property prices are soaring."
Lee said he was aware of one Wellington mortgage fund which had been forced to freeze redemptions and a Christchurch fund which had done so in the past because they did not have enough cash to pay out large numbers of departing investors.
But other mortgage trust providers have said they haven't noticed increasing arrears and won't be closing down their funds.
Leonie Gordon, a spokeswoman for managed fund research house FundSource said she had talked to several providers who said they didn't have any problems with liquidity.
"Many don't have a big retail base - they are mainly invested in by lawyers and trustees. We still believe they are a very valid investment product."
She said some funds were provincially based and did not have the issues Tower faced because of its high exposure to the Auckland market.
"Tower obviously had arrears blooming. Other clients have told us they don't have this problem."
One of the reasons Tower cited for closing its fund was the difficulty in converting it to a portfolio investment entity but Gordon said half of the 20 funds it monitored had already converted into PIEs.
Gordon agreed that the main risk for the mortgage funds was liquidity.
"A loss of confidence could bring on a liquidity crisis."
But she described it as a self-perpetuating problem in an industry where there wasn't anything inherently wrong.
