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Interesting to also see Brian Gaynor come out with a similar story to you Phil, rather than the dramatics portrayed by the NBR with the 'interview' or 'commentary' by a lending competitor. As an investor in a range of managed fund products from cash through to equity, I am interested in this latest development as it's a move away from the debenture market debates. So, based on what has been said to date, and some basic research, these are my thoughts, for what its worth.
History shows the TOWER fund has won several awards, yet the mortgage fund NBR quoted has not (it's a newbie though). So the TOWER fund must have been doing something right to earn that?
The comments in the NBR particularly intrigued me in so far as it screamed out, "look at me, we're better than everyone else", so I did some digging on Midland Trust. I see from the Midland Trust prospectus and investment statement that the manager of the fund Peter Harrison is a CA from South Africa, (not a seasoned lender it seems) and is a recent arrival on our shores. And its mortgages were mainly originated from lawyers' nominee funds (as also stated in the NBR) - so we have mortgages sourced by lawyers managed by an accountant!!! What exactly do they know about lending? It's like me asking the dairy owner to fix my plumbing.
I also want to ask why didn't Peter Harrison put up his arrears statistics instead of just bagging TOWER's? Perhaps, just perhaps, and I don't know if this is the right terminology, his fund has only capitalised interest loans which are not yet showing as arrears - but they probably will when they mature and there is no cash flow for the borrower because of this market. Time will tell I think. I do hope his comments don't come back to haunt him and his investors. I recall this lending style was raised in the paper about Lombard and its Brooklyn loan.
Another thing to ask then - is the lending of all these trusts the same? I think not, as if they were lending in the same circles, then rates of return and arrears would be similar wouldn't they? According to the published FundSource data TOWER's return does seem to be quite a bit lower, so probably indicating either a more conservative lending book than its competitors, who appear to pay a higher return, or otherwise TOWER lends out at a lower rate than its competitors - but then wouldn't competitors then drop their rates to compete? I'm confused.
Like Peanut H says, there probably is too much drama being made over the arrears as well I think. We are in tight times and I think the TOWER announcement just came at the wrong time on the back of Lombard. If they shut it down 18 months ago before Bridgecorp, Provincial and the rest, nothing would have been said in the papers. What other mortgage lenders have closed in recent years that we never heard about?
And I also don't understand Stubbs' comments about PIE difficulty. Why doesn't he tell us what these difficulties are as we are told other mortgage trusts have done it - but interestingly the Midlands Trust who was quoted in the NBR also hasn't yet converted.
Overall TOWER seems to be doing the right thing in my opinion, if they have a fund which cannot compete or beat a bank deposit, then it makes sense to wind it down and pay out as they announced. Unfortunately for TOWER, timing is the issue here.
I must clarify my earlier comments before anyone gets uptight and too PC.
My remarks were only meant to infer that a fund of some four years with unknown people behind it is not really in a position to comment on;
a)what I have read has been a well managed fund for some 18 years, and
b) thier thoughts on the industry as a whole.
They were not personal upon Peter Harrison's character - merely facts I found.
It is very clear that after 18 years that market forces have impinged - some may say unfairly - on TOWER.
I don't know what digging will do - the numbers are there -apparently only some 8% ($17m?) of the loans are now 30+ , so they must be managing them OK. What will digging find exactly? Who the borrowers were? Not Bluestone, I read today.
Can anyone advise how we find out about any lending firms' recent arrears before investors give away thier money? Not ones in one year old accounts. Do they hand this out? Or is it sensitive data?
As i said, my view is that a down-turned market has hit some borrowers hard. Give them time and they will repay.
It's not like the fund lent 100% loans (its investment statement says first residential mortgages only to maximum 75% LVR) or did second mortgages, so there is some equity buffer if I read it right.
Say the $17m was 75% residential. That means the property values at lending was $22.5m. It's even more if it is commercial because the investment statement said 66%. So there is a buffer that isn't there, plus any increase in CV since the loan was done (less what we are told by BNZ about a 30% downturn).
Shat about second mortgages borrowers took out - if there was any. That means some finance companies lose out first. Am i missing something here? Why has this not been raised - which finance companies?
If they wrote off 1-2% that comes off income? So capital is still there?
Doesn't a fund of $220m earn $19m a year in income? So investors forgo income for a year. Better than losing capital like in so many debenture failures.
Maurizio, what do you think they should do - keep going? Why? If its not competitive, why keep it going? If Geoff Murphy's car only has three cylinders going, he's not going to keep racing it around the race track at Hamilton is he?
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The returns the Banks are offering are unrealistic....not because they are too high Phil. But because that's where the risk today is higher.
The issuances you quoted were not bonds...where Tier 1 capital emissions and with all the due clauses to call them if and when conditions will be better...but if the banks are paying the capital those (high) prices, is for the good reasons they are now the dangerous points of the system.
And somehow , they are setting themselves up to shoot a cannonball in their own keels by raising the costs of the mortgages to the non subprime ( the regularly paying punters) to offset the high price of capital they themselves triggered by financing mortgages that should have never been.
I come from a country that is not a model of financial savvy...but so far, in my place, my generation was raised with the idea that if you wanted a home, you start working in your 20s renting one and saving, then you bought a small home in your 30's with at least a 50% down payment, and a 10, max 15 years mortgage.
In your late forties, you sold the small home and traded up, always with a 10/15 years mortgage, from 55 to 65 you saved money since you would be, by then ,motgage free, and at retirement time, you sold the large dream home, bagged the capital and headed for a remote seaside location where life is less expensive.
And no one found this timeline outrageous. 1 year ago, I had just came to NZ, was watching TV , and the light was on a couple, he was 23, she was 21, just married and both working, and the interviwer then was facing the camera, and looking utterly outraged because the young couple could not afford a home,due to the high prices, and that was presented as a matter of national shame.
To use a Kiwi expression...I was totally buggered!
I didn't dream to buy a home when I was 21...even dream was too expensive, and at that time it seemed totally natural.
To make a long story short, I can understand why Tower is unwinding, How can you compete with the over 10% pay outs offered bythe Banks ?
But who invested in the "safe" offerings of the banks should beware of "safe" things paying well above the Bank bill rates.
Higher returns are equal higer risks, it is one of the most rigid and true relationships of the financial markets.
And you should beware also of the social consequences, since passing the costs on the viable mortgage payers will make a portion of them less and less comfy in paying that mortgage...therefore deepening the very same gap that started it all...the gap to make ends meet for Joe Public.
Beware..the Banks are shortsighted and driven by the quarter results...they will not look if after that hill there is a precipice, exactly as they did with subprimes and CDOs, when THEY started it all.