Why You Lose Your Money In Pooled Mortgage Investments & What To Do About It
Private Contributory Funds could be the answer…
We interview Domenic Calabretta from Hall Chadwick to get his valuable insight on pooled mortgage investments plus much much more.
Watch the video and/or read the transcript below.
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Domenic: My name is Domenic Calabretta, partner at Hall Chadwick. Hall
Chadwick is a full service accounting and corporate recovery firm
Question: Why do pooled mortgage funds and debenture funds seem to be
Domenic: I think there are a few reasons why they keep failing. The
first one is the obvious one – liquidity problems. Mortgage
funds are long-term investments. After the global financial
crisis, a lot of people wanted to pull out their cash. Because
of the type of investment that mortgage funds invest in, it’s
not a short-term investment, and therefore, there is a mismatch
between people wanting to take out cash versus realising the
The second issue is high risk lending. That’s one of the major
problems that the industry has faced. A few mortgage pooled
funds have provided lending to low doc loans, development loans,
and they are high risk lending investments.
Question: ASIC has a bee in its bonnet about them. Why?
Domenic: The main problem ASIC encounter with these funds is disclosure
problems. A lot of the mortgage funds aren’t disclosing full
information to its investors, and therefore investors aren’t
fully educated or have no full knowledge of what their money has
been put into.
Question: What can investors do to protect themselves to minimise risks
in this asset class?
Domenic: I think that they need to determine, first of all, are they in
there for the long term or the short term, because that sort of
provides them the platform and what mortgage funds we invest. Do
they need the cash in a year? Do they need it in a few years?
Mortgage funds sometimes cannot pay out all redemptions in one
Secondly, they need to determine what type of asset the mortgage fund
is lending against. As I said, is it a high risk asset, such as
development loans, second mortgages, etc.? Also they need to
determine whether there’s a bank that’s lent to the mortgage
fund. A lot of investors don’t realise, but sometimes they are
second in line behind the bank. If a bank has lent to the
mortgage fund and if there is a shortfall in assets, they lose
Question: What are your thoughts on the contributory mortgage model?
Domenic: The contributory mortgage model, it’s good because it provides
investors full disclosure in what they have invested in, rather
than having a pooled fund where their money is diversified into
various asset classes. Therefore, they know the risks associated
with their investment and have total control and disclosure of
where their asset is up to.
Question: Is the cleanout in this industry finished, or is there more to
Domenic: I think there’s more to come. Last year we saw two major
mortgage fund managers collapse, being Provident Capital and
Banksia Group. I think ASIC and the public will want answers,
and there still needs to be a cleanout in this industry.
Question: Is heavier regulation of fund managers the answer?
Domenic: I think heavier regulation is required, but it’s not the only
answer. I also think education is an answer and provide
investors education and full knowledge of risks associated with
mortgage funds so that when they do put money into these types
of schemes, they are fully aware of the potential risks down the
Question: How reliable are property valuations?
Domenic: It depends on first of all the instruction, where it’s come
from, of the property valuation. Secondly, what type of asset is
being valued? Some assets are easily valued. Some are difficult
to value. So it’s pretty important. The most important thing
that needs to be considered with valuations is they do change. A
property valuation, which was done four years ago, isn’t
necessarily going to be correct today. So people need to be
aware that valuations do change, and I think this is one of the
major problems that mortgage funds are encountering is that
they’re relying on old valuations and not impairing their assets
based on today’s value.
Question: Are valuations important when lending against a property? Or
should you do your own due diligence?
Domenic: I think both are important. You should get a valuation, but
doing your own due diligence is also important because it gives
you full knowledge of the asset, and also it gives you an
understanding of the potential risks that could be associated
with whatever is being valued. So I think it’s important. A
property valuation is definitely important, but doing your due
diligence on a particular asset is extremely important. That’s
why the problem with pooled mortgage funds is it’s hard to do a
due diligence on various assets classes because you don’t know
what you have invested in.
Question: In your opinion, why did Banksia fail?
Domenic: Based on what I’ve read in respect to Banksia, I think the main
reason is they were carrying forward bad loans, and they were
never incurring the losses or marking down those loans to the
true value. I think all investors were sort of shocked when they
heard of the collapse and secondly that the realisable value of
the bad loans that Banksia held in their books. So I think it’s
important, as I said before, valuations are extremely important,
and having a current value of assets is a lot more important
than carrying forward the valuation from years ago, because, as
I said, the present value is a lot different to what the value
of an asset was a few years ago.
Question: When investing in a pooled mortgage fund, is it fair to say
there’s no real way of telling what the security value is worth
across that pool?
Domenic: That’s exactly right, because it’s such a diversified
portfolio. Unless you go and value every individual asset, one
asset might affect the value of the other asset, because it’s
all pooled. So if it’s a pooled mortgage fund, for example, it
might have different assets. They might have a development loan,
and it’s also lent against a residential loan and a commercial
property. Now if a development loan gets impaired, that affects
the whole asset class across the board, and investors are the
ones to lose out. So it’s a lot more difficult to control and to
do due diligence on a pooled mortgage fund.