Managing Director of SQM Research, Louis Christopher said, “Australia’s mortgage trust sector has experienced rapid growth over the past 12 months. From our observations, funds under management has nearly doubled.

In our view, arrears in the sector have remained very low, keeping overall default risk at bay. However risks may increase as tightening of lending criteria affects refinancing of existing loans. Additionally, the rapid increase in Funds under management creates a counter risk of a rapid withdrawal event should managers not prudently safeguard these inflows.

While the lending book of mortgage trusts are dominated by Interest Only loans, the strict lending criteria applied by mortgage trusts reduces refinancing risk. LVRs are considerably lower compared to the broad market and the scrutiny applied on the borrower is also significantly higher.”

The Mortgage Trust sector report has been split between pooled mortgage funds and contributory mortgage funds (peer-to-peer mortgage funds). Of the funds reviewed, four operate pooled mortgage fund structures and three funds operate contributory mortgage fund structures.

Key points:

• For the year to December 2017, fund under management rose by 92% to 2.5 billion dollars for the mortgage funds reviewed.
• Arrears overall for the mortgage market remain muted with a low level of bad debt and non-performing assets was less than 1.0% of total loans.
• There has been an increase in pooled mortgage products while peer to peer mortgage funds have received additional investor interest.

The following funds operate pooled mortgage structures. Some of which (Firstmac High Livez, Boston Private Income Fund) operate a securitised mortgage fund. Of the six pooled Mortgage Trusts rated, five maintained the ratings received in 2017 and one was an inaugural rating.

The following four funds operate contributory mortgage structures (mortgage peer-to-peer).

A contributory mortgage fund is structured to allow investors to acquire a fractional interest in a specific mortgage of their choosing. The structure allows investors to individually control their investments and invest only in a mortgage that matches individual risk and return profiles. The trade-off for investor control over investment decisions is a lack of diversification. To achieve diversification, investments need to be made to multiple mortgages which when compared to pooled mortgages can be expensive.

Contributory mortgage structures (mortgage P2P lenders) are increasing footprint with new products from recognised fund managers being released into the market

Overall, the mortgage trusts reviewed delivered satisfactory returns and credit performance was strong with only minor arrears being recorded.

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