This article appeared in the Australian Financial Review.
The country’s mortgage trust sector, which has passed $15 billion in funds under management, has so far sailed through the economic turmoil unscathed, with minimal arrears and bad debts. Close attention has been paid to mortgage trusts amid the coronavirus-caused slowdown, after the sector was one of the hardest-hit during the global financial crisis a decade ago.
The sector has booked rapid growth over the past 12 months, increasing its funds under management by 30 to 40 per cent, according to an SQM Research report. Bad debt and non-performing loans account for less than 2 per cent of total loans from the sector.
“Thus far in 2020, the negative economic effects of coronavirus have not as yet had a material effect on sector performance, though we are closely monitoring the sector,” managing director Louis Christopher said. “In this downturn we are not seeing any significant outflows and so far distributions have not been cut.
“This is quite the contrast to 2008 when there was a run on the sector with many trusts suspending redemptions and distributions. In this downturn we are not seeing any significant outflows and so far distributions have not been cut.”
Mortgage trusts use unitholders’ capital to invest into property loans through a variety of methods. A contributory mortgage fund allows investors to acquire a fractional interest in a specific mortgage of their choosing. A mortgage trust can come in the form of a residential mortgage backed securities fund where the underlying assets are a basket of tradeable mortgages, typically issued by banks and financial lending institutions.
The lending book of mortgage trusts is usually dominated by interest-only loans. Mr Christopher lending standards in the sector had improved considerably since the GFC. “While the strict lending criteria applied by mortgage trusts reduces negative refinancing risk, we do believe there has been some pick-up in forced refinancing by borrowers,” he said.
“That said, arrears still remain low at below 2 per cent overall for the rated sector and loan-to-value ratios are considerably lower compared to the major banks, providing a good buffer for the sector should real trouble arise.” Arrears were higher on elevated risk-oriented funds such as funds with a high construction loan exposure, the SQM report noted.