One of the dangers of the recent sub-prime crisis is that investors avoid low-risk fixed interest investment products because they lack
understanding about these products, and are confusing them with the US sub-prime situation.
Mr Roy Prasad, head of mortgages at Australian Unity Investments (AUI), says that investors seeking defensive assets shouldn’t shy away
from mortgage funds because of a misplaced fear that they are somehow linked to sub-prime mortgages.
“In fact, now is the right time for investors to consider conservatively managed, conventional mortgage funds because they can often provide
the diversification, and lower levels of risk, needed in portfolios.
“Conventional, well-managed mortgage funds provide a sensible balance of risk and return that investors need most in periods of market
volatility, and have an important place in portfolios where investors want fixed income combined with diversity.
“Sub-prime mortgages are a completely different product that is specific to the US. In addition, the level of risk in some sub-prime mortgages
was particularly high because money was lent to people with poor credit histories who couldn’t afford the repayments on residential
properties declining in value.
“However, most Australian mortgage funds follow strict lending criteria, significantly reducing risk. Those that lend only on first mortgages,
and have geographic as well as property sector diversification, further reduce risk,” he said.
Mr Prasad added that it is still a time that calls for extra care and investors should always ask the tough questions before putting their money
into any investment product.
“The key lesson to take away from the subprime collapse is that the relaxation of credit quality ultimately leads to defaults and capital losses,
and there is no substitute for rigorous lending practices, diversification of property types, and geographic spread in mortgage lending.
“First registered mortgages on sensible valuations of quality real estate may not be risk-exempt but the risk is managed, and even if there
are defaults, as long as the property is of high quality and there aren’t major time pressures, first mortgage holders usually get their money
back.”
Mr Prasad says that, when considering mortgage funds, prospective investors should consider the following:
· What is the security ranking? Does the fund only invest in first mortgages?
· Does the fund invest in ‘low doc, light doc or no doc’ lending? If so, there is a higher chance of defaults within the fund
· Review the credit assessment process undertaken by the fund manager on any mortgages – there should be no differences in process
between conventional or high yield funds
· Check that the individual loans within the fund are limited to 7.5% of the fund’s overall size
· Is there any ‘stress testing’? Will the borrower be able to keep up with repayments if interest rates increase?
· Check the mortgage fund’s level of arrears by borrowers – a fund operating with significant arrears is an indicator that the credit
process of the manager is weak
· Make sure the fund has good diversification – for example, by property sector or geographic region
· Ensure there is no related party lending, for example, a property developer raising money to fund their own developments or
investment products.
Australian Unity Investments is the funds management arm of financial services, health and retirement living services provider Australian
Unity. It has over $6.5 billion in funds under management. Its approach to product development is to use its established in-house expertise
in property and mortgages while also forming joint ventures and strategic alliances with other organisations with specialist expertise.
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For more information please contact:
Roy Prasad
Ph: 03 8682 4405
E rprasad@australianunity.com.au