Mortgage trusts’ FUM ‘nearly doubled’ in the past year

Property advisory and forecasting researching house SQM Research’s recent review of Australia’s mortgage trusts has found that the sector experienced “rapid growth” in the past 12 months.

According to the 2018 Australian Mortgage Trusts Sector Review, over the 12 months to December 2017, funds under management (FUM) at 10 mortgage trusts increased by 92 per cent to $2.5 billion.

Rafio Khan, investment analyst at SQM Research, told Mortgage Business that the increase was down to a range of factors, including macro-prudential measures implemented on the banks that are diverting loans to non-banks as well as the strength of “the whole property market” and an uptick in lending generally.

Mr Khan said: “Some of the banks have been turning back lending [to some borrowers] off the back of APRA regulations. Recently, we have seen some of the banks enforce more stringent expenses when people are getting loans, so this sort of tightening impacts how much a borrower can receive from the bank.”

However, the analyst said that this has been a boon for non-bank lenders.

“We’ve seen the non-bank sector pick up a lot of extra lending capacity from that [tightening],” Mr Khan continued.  

“The funds have been flowing in to these funds instead of going to the banks. So, the funds under management dollar value has gone up, but some have increased in number as well.”

He added that should lending policies tighten further, “chances are that marginal buyers will be able to borrow less”.

Despite this, Mr Khan noted that arrears in this sector have remained low, keeping the overall risk of default at bay.

The review found that arrears overall for the mortgage market remain muted, with a low level of bad debt and non-performing assets being less than 1.0 per cent of total loans.

Mr Khan said: “Even the Reserve Bank of Australia is finding that some mortgages are ahead of their repayments as well, and arrears are low, as our research suggests.

“So, that risk with interest-only repayments and even principal and interest repayments hasn’t manifest in arrears, or delinquency rates so far, but the risk doesn’t disappear.” 

The investment analyst suggested that the tightening of credit would mean that borrowers who were lent money on “looser criteria” may not be able to refinance their loans and must take reasonable steps to satisfy the new lending criteria or run the risk of falling into arrears.

The managing director of SQM Research, Louis Christopher, added that the rapid increase in funds under management also creates “a counter risk of a rapid withdrawal event should managers not prudently safeguard these inflows”.

He continued: “While the lending book of mortgage trusts are dominated by interest-only loans, the strict lending criteria applied by mortgage trusts reduce refinancing risk. Loan-to-value ratios are considerably lower compared to the broad market and the scrutiny applied to the borrower is also significantly higher.”

The mortgage trust sector report was 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.

The review also rated the funds out of five stars, with the La Trobe Australian Credit Fund – Pooled Mortgages Option coming up top with a rating of 4.25 stars (which SQM suggests is “suitable for inclusion on most approved product lists”).

Mr Khan said that La Trobe Financial was ranked highest among the trusts for a range of factors, including the fact that “the people that are running it are very qualified, very knowledgeable and know what they are doing; the governance structures are very strong; it is well capitalised and very transparent in its dealings (for example, it is very forthcoming in its processes and lending requirements), and it has been in the game for a very long time”. 

“So, everything they do, with every factor, is just better than everyone else, and the portfolio is very well diversified, has very stringent lending criteria and follows the rules,” the analyst said. 

“It has very good processes in place for managing arrears and defaults, if any. And it has been in the game for a very long time, so it is very hard to fault [a trust] of that calibre who has so many bases covered so well.”

The trusts reviewed were:

1. La Trobe Australian Credit Fund – Pooled Mortgages Option
2. AIMS Commercial Mortgage Fund
3. Trilogy Monthly Income Trust
4. EQT Wholesale Mortgage Income Fund
5. First Mac High Livez
6. Boston Private Income Fund
7. La Trobe Australian Credit Fund – Select Mortgages Option
8. Balmain Private (Balmain Discrete Mortgage Income Trusts)
9. Australian Unity Select Mortgages Fund
10. Rate Setter Lending Platform

[Related: Non-bank posts strong growth following merger]