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Contributory mortgages under spotlight

The Securities Commission is becoming very concerned about contributory mortgages and the way they are being promoted to investors.

Wednesday, November 28th 2001, 3:13PM

by Philip Macalister

The Securities Commission is becoming very concerned about contributory mortgages and the way they are being promoted to investors.

Commission chairman Jane Diplock says currently there are 21 schemes registered with the Registrar of Companies and more than $195 million has been invested in this area.

She says complaints have been made to the commission about nine of the 21 schemes.

"We firmly believe there is some good, quite sensible and appropriate contributory mortgage schemes," she says. "But it just concerns us when you see the number of them which are coming before us for one reason or another where it appears there may be some problem with them."

The complaints have come from the public, other people, or from the Registrar of Companies.

She says the main issues appear to be:

  • Advertisements maybe confusing or misleading.
  • Management of accounts are not up to standard and mortgages maybe difficult to audit
  • Priority of mortgage isn't well explained.

The commission is concerned that contributory mortgages, and their risks, may not be well explained to investors.

Under contributory mortgages the investors’ money is pooled and lent to the borrower or developer, usually at high rates of interest.

Often, the developer or borrower cannot get finance from banks or other traditional lending institutions and is therefore prepared to pay the higher rates of interest charged by contributory mortgage brokers.

"Some of these projects are marginal at best," she says.

"In some cases the rights of the small investor may be subordinated to the rights of prime lenders such as a bank or other financial institution, which has first claim on the property if the borrower defaults."

"There is probably a place in the market for high risk investments, as long as people who enter into them understand what they are entering into," she says.

"(Investors need) to understand where they are sitting on the risk curve."

While the commission is "quite concerned" about contributory mortgages it has no plans to ban them outright.

"There are some well-managed schemes," she says.

In Australia, contributory mortgages are covered by the Managed Investments Act which is more stringent that contributory mortgage regulations in New Zealand.

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You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

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