Defending contributory mortgages

Not all contributory mortgages are bad, Cairns Lockie director William Cairns says.

Although many contributory mortgages are getting into trouble, and the Securities Commission is investing about half of the ones on offer, there is a place for them.

The problem is that some people are using them incorrectly, he says.

"People are using them for what they are not designed for. They shouldn't be used for speculative subdivisions or development (properties)."

Contributory mortgages should be used to fund residential properties, small farm loans and commercial buildings.

These are the sorts of deals where there is good asset quality, but there may be problems with the borrower and their credit history, such as age and proving income levels.

Lockie says the higher risk deals, or borrowers who fall into the 'lenders of last resort' category, should be getting money from banks or finance companies. If they are unable to get funding from those organisations they should be going to private investors, but not through contributory mortgages, he says.

The other big problem is the regulations that govern contributory mortgages. Cairns says the legislation is "highly prescriptive and cumbersome."

He believes contributory mortgages should be forced to have a trust deed and be called mortgage trusts.

Wellington-based firm Lombard has already started pulling out of its contributory mortgage business and has established a replacement mortgage trust.

Money Managers has done a similar thing also by establishing its First Step mortgage fund. Many of the projects that the firm used to finance through contributory mortgages and property bonds are now done through First Step.

The recent Parliament Street contributory mortgage, which has been the subject of Securities Commission attention, was funded through a contributory mortgage because it was too big to be funded through First Step.

Money Managers managing director Doug Somers-Edgar says that if any of its problem investments (Ballantyne, Park Terraces and Metropolis) had been done through First Step there would have been no loss to investors.

"We would have stepped in early and solved the problem," he says.

The problem with Ballantyne was that the level of pre-sales was too low and the development ran out of money.

"First Step would have advanced the money and it would not have happened," he says. "It only needed $1.5 million."

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