FREQUENTLY ASKED QUESTIONS
While this statement is correct it fails to take into account the differences between the lending criteria of Mortgage Trusts and Finance Companies.
Mortgage Trusts unlike most, if not all, finance companies lend investor funds out on predetermined published lending criteria. This lending criterion has been regarded as conservative when compared to both finance companies and banks.
The general public are now very aware that many finance companies, and in some instances banks, have lent in excess of 90%, and in some cases 100%, of valuation on property.
Mortgage trusts typically lend up to 66% on independent valuation depending on the type of security. You will see from our Product Disclosure Statements that our maximum lending ratios on all property types are clearly disclosed.
An independent supervisor oversees every loan draw down to monitor that no loan exceeds the lending value ratio that is prescribed in the mortgage trust Product Disclosure Statement and each loan is supported by an independent valuation.
I don't know of any finance companies or banks that publish their maximum lending limits and that also have an independent body review every loan advance to see that it meets the terms specified in their investment offering.
Capital is a great thing but when you are lending to higher levels you accelerate your investor risk. The question then becomes what level of capital would you think would be needed to offset the risk associated with higher lending advances on securities?
The majority of finance companies operate on a 7.5% capital base and normally provide both 1st and 2nd mortgage finance or funding for chattels (i.e. trucks, cars, appliances etc). Two major banks in NZ have recently come out stating they will no longer lend on residential property to the high levels they have previously (90% and in some cases plus).
So without wanting to play down the value of capital lets compare apples with apples. If you had a lending institution, (which I don't know of any) that had the identical lending criteria as FMT and a capital base to off set losses, you have in my opinion possibly found a stronger investment option.
FMT does have a reserve fund to offset losses. This has been built up over the years and is available as a first call on losses.
I don't agree. I think any lender that only lends on first registered mortgages to relatively conservative levels against independent valuations should not be regarded as 2nd tier.
I feel finance companies are more likely to have the honor of that title.
I think banks and mortgage trusts are not that dissimilar in 1st mortgage lending and the pricing of their loans. Now that information is surfacing on many of the finance companies, we are consistently seeing they have lent on second and in some cases third mortgage securities. Possibly in the current market these securities are not worth a lot?
I don't know of any mortgage trust that lends on 2nd and 3rd mortgages - FMT only lends on first registered mortgage securities.
Yes I agree. Returns would normally be reflected in the risk to investors. I don't feel we are comparing apples with apples as most finance companies and bank investment offerings are based on term investments (i.e a fixed term 6, 12, 18, 24 etc months) and in many instances finance companies will not let you break your investment before the end of the term. Banks are usually a little more accommodating if you need to break the term investment but a penalty usually applies. While FMT has the ability within our Product Disclosure Statements to charge a fee we have never yet done so. More importantly, mortgage trusts don't have a fixed term, so there is no investment maturity date. I will cover this in more detail shortly.
Yes we do. Don't all banks and finance companies?
At face value based on a strict legal interpretation this statement is correct as investors can request to withdraw their investment at any time.
However the reality is somewhat different. The average term that existing investors have invested in FMT is in excess of double, in fact nearly 3 times the time of our normal loan term.
Yes that's right. Lets think about this, by mortgage trusts not having a fixed term investment, they know on a daily basis what redemptions are being made and have provisions within their Product Disclosure Statements to take up to 90 days to meet repayments if they need to.
Finance companies and banks have the benefit of knowing the date the investor's investment expires but they don't know if the investor will renew/roll over their investment or take it out. What would happen (and in fact what did happen in recent times) if investors chose to redeem their investment from many of the finance companies on the expiry date of their investment - sorry no money!
Do individual banks hold the level of liquidity they would need if every investor decided to redeem their investments? Obviously no they don't nor could they. This is the same for mortgage trusts.
Yes that's right, most have no credit rating. How many finance company failures have we seen where they had a credit rating?
I am not belittling credit ratings. I suggest they are only a tool to possibly help make an investment decision. From past history many investors have used a credit rating to make their investment decision and now regret that.
What finance company or bank is guaranteed by their owner? The owners of the mortgage trust are in fact the unit holders in the mortgage trust. In simple terms the investors own the mortgage trust and the trust is managed by a manager for the investors.
Unlike Banks and finance companies which take all the profit they make above what they offer an investor, mortgage trusts are managed by a manager who charges a fixed fee. This is usually around 1.5% and the investor gets all of the income after the deduction of the fee.
This is very different to many finance companies who charge interest rates far higher than what they pay investors and retain those margins themselves.
FMT usually maintains in excess of 10% liquidity. I wouldn't call that illiquid.
It would be fair to say that it has been a lack of liquidity that has been the trigger for most of the recent finance company collapses.
My advice to investors is to be very careful here. There are many instances where the government guarantee does not apply. I think we will start to see more media on this point.
Mortgage trusts, to the best of my knowledge, pay 0.25% commission. Some finance companies have been known to pay up to 3% plus incentives.
FMT have several thousand very happy and contented investors who are satisfied with the return the fund provides and the security behind their investment.