Government Bank Guarantee Unsettling For Mortgage Finance

The Age

Thursday October 23, 2008

SCOTT ROCHFORT and JACOB SAULWICK

MORTGAGE finance companies are warning that the Federal Government's bank deposit guarantee will not only undermine their business, but could weaken the property market.

The warning came as executives from the financial services sector lobbied ministers about the deposit guarantee's impact on the non-bank sector. "This issue has caused concern and uncertainty where it didn't need to," Perpetual's head of investments, Richard Brandweiner, said. "They were very safe investments."

Most in the industry believe the Government had little choice but to offer banks some sort of assistance amid the credit turmoil, but that the guarantee on deposits has created unintended consequences. Mr Brandweiner said that backing deposits affected the ability of non-bank funds to lend money to developers, further depressing property prices.

"It is likely to have an impact on the ability of borrowers to refinance and could lead to further weakness in the property market," he said.

Mr Brandweiner's comments came after the country's largest fund, the Challenger Howard Mortgage Fund, this week slapped restrictions on 30,000 retail investors redeeming their deposits in the $2.8 billion fund.

Perpetual, manager of the country's third-biggest mortgage fund, said there had been a small increase in redemption requests from the $2 billion Wholesale Monthly Income Fund. Asked on ABC Radio yesterday what he would say to investors with money frozen in mortgage funds, federal Treasurer Wayne Swan tried to shore up confidence in the sector. "What I say to them is that their investments are safe, but our decision to provide the guarantee will put further liquidity in the system and make sure that the very central part of our financial system is stable," Mr Swan said.

But several smaller mortgage schemes have already struck trouble, even before the Government agreed to stand behind bank deposits. The model of funds offering high returns to investors, whose money they then lent to property developers and other small businesses has been caught out by climbing interest rates and sagging property prices.

One of the biggest, City Pacific's $1 billion First Mortgage Fund, has frozen redemptions and is struggling to repay a $130million debt to the Commonwealth Bank.

"Some of these funds are positioned quite well, with good liquidity and ability to lend money to reasonable projects," said Morningstar head of research Anthony Serhan.

But he said that if funds were forced out of the market, it could have an impact on the broader economy.

"The banks are the main providers of finance out here, but we are talking about a not-insignificant area of financing," he said. The executive chairman of Adelaide-based mortgage lender Angas Securities, Andrew Luckhurst-Smith, said the Federal Government's protection of bank deposits would create even more unfair advantages for the big four banks. Despite the gloom descending over the industry, Angas Securities has continued to promote on radio advertisements in Sydney redeemable preference shares that will pay 11% interest.

© 2008 The Age

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