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We've seen it all before...but it still hurts

Tuesday, July 29th 2008, 10:17PM 4 Comments

by Philip Macalister

The scary thing about this Blog is that it shows my age! All this turmoil in the investment markets – with finance companies and mortgage trusts – reminds me of a major event that happened back in the early 1990s. Back then, investors on both sides of the Tasman, loved unlisted property trusts. Indeed it is where many firms made their name. This property sector imploded in spectacular fashion when investors suddenly lost confidence and demanded their money back. Then the key issue was that you had long-term illiquid assets, matched with investors who had short-term expectations and expectations that they could redeem their investment at will. What happened is that investors sought to cash up their funds and managers responded by freezing redemptions. To get the cash they would have had to sell assets at a discount. To me there is very little difference (or lots of similarities) between what happened then and what is happening now. The two factors at play are investor behaviour and a depressed property market. Something many people will have heard me say in recent months is that markets work in cycles. We have been through these parts of the cycle before. The good thing is that we know, particularly in investment markets, that we come out the other side. The stuff we are seeing now is not brought about by shonky schemes, or rubbish management. It’s brought about by changes in the market and investor sentiment. What companies like Hanover and these mortgage trusts are doing is the right thing. As long as the underlying assets are OK, people shouldn’t panic. Sure it is frustrating, but be patient.
« Answering the big question over HanoverChange of plans but are we there yet? »

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Comments from our readers

On 30 July 2008 at 5:20 pm Red Dog The pirate Guy said:
The problem is that historically,Orthodox financiers were lending against cashflow,and Unorthodox financiers were lending against asset valuation.
At present,Orthodox financiers are lending on asset valuation,staffed not by old school bankers but by young salespeople who sell money on a remuneration package which is structured to reflect the volume of money sold.

A valuation is only one person's opinion at one point in time.
Asset prices have worldwide been bidded up too high due to a feeding frenzy,with people going to a property investor seminar becoming as indoctrinated as Exclusive Bretheren Cult Members.

When they start to lose their faith,property prices come down,and valuations are exposed for what they actually are.
After all,you can hardly call Property Valuation a profession which requires a high degree of skill,compared to other professions.

The underlying assets might be "OK,"but what price can a financier realise under an insolvency.
Unfortunately,generally not sufficient to pay all of a company's outstanding creditors.
On 31 July 2008 at 8:38 am Red Dog The pirate Guy said:
The news release on the Canterbury Mortgage Trust Group investment Fund states "The trusts's loans were on the basis of up to 75% of the registered valuation on homes and residential property investments,up to half the registered valuation for farms and up to two-thirds of registered valuation on commercial properties."

"The trust had been generally regarded as a lower-risk investment because it was solely a first mortgage financier" said Mr Don McBeath a director of the fund management company.

This is all very comforting for investors in the fund.

However,less reassuring is "The directors said the quarterly interest payment due on 1 October 2008 would still be made.However,it is likely that the return will be less than we have previously been able to pay.This is because we think it is prudent to make any provision against any further losses in the loan portfolio in the light of the current state of the financial and property markets,so that investors' capital is protected."

Yet it is also stated "In fact at 31 March 2008,the fund's average loan to valuation ratio or LVR[loan amount divided by the security value of the property that is offered for security] was 52%.

If this fund is facing loan writeoffs,what does that say for investors in Hanover Finance ?
On 1 August 2008 at 10:03 am Interested Party said:
I've just read the Q & A for GT's mortgage fund - what a load of tripe! Is anyone actually buying it? On the one hand it says there's liquidity issues, yet they also say that there hasn't been a unusual demand on funds and there are no arrears 90 days + (which has got to be rubbish - even in a good market, lets face it, most people will only borrow from a mortgage fund if because they have difficulty getting finance from a bank. I know from experence while working for a major NZ bank that its mortgage fund did all the marginal lending while I was there. Also my own loan book when I was lending had arrears in it and that was significantly smaller than the GT fund and they were all bank approved deals - sometimes people just let things slip).

If thats really the case then why isn't it business as usual. I smell something less than honest and no doubt so do a bunch of GT's clients, I'd expect you to see a significant run on all its other funds, particuarly if people are looking at the prospectus's and are noting that the cash and mortgage funds can swap assets - I'm a little surprised that the media hasn't picked up on it yet. My guess is that the reason why the mortgage fund has no arrears is because all the bad loans have been switched into the cash fund ... just a hunch ...
On 1 August 2008 at 2:10 pm Philip Robinson said:
We can't have our money back until loans and mortgages have been repaid so where do the people get new mortgages from to pay us all back considering they don't fit Banks lending criteria or they would have gone to them in the first place!
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