Crikey has suggested the banks shold back their own mortgage funds, so has the Future Fund’s David Murray, who is also the former head of the Commonwealth Bank. But the Australian banking and finance sector has resolutely refused to back their funds which are facing investment outflows from nervous investors.
That’s why we now have the near charade of the Federal Government offering to extend its deposit guarantee to these managed funds in the property mortgage area, if they become banks: an idea that is more silly than rational.
We now have the absurd position where the likes of the Commonwealth, refusing to provide any support for its funds management arm, Colonial, which has shut redemptions from its property mortgage fund. Effectively, Mr Rudd has allowed the likes of the Commonwealth, AXA and Perpetual to escape any responsibility for these funds, while continuing to charge management and other sneaky fees.
It’s outrageous. We have been told repeatedly that our banks are fine and strong (and the record $1.3 billion final profit from St George will confirm that today), and yet they are being allowed to wriggle off the hook in a way that they do not allow their customers and clients to follow.
It’s not just the CBA. Fifteen or more funds, including those from AXA, Perpetual and Macquarie have applied restrictions. Regular payments will continue, but in most cases, investors will be restrained from withdrawing all their funds. You have to again ask why the CBA and others in this sector are incapable of supporting their managed funds, or why they don’t want to?
Some cynics suggest that with commercial and residential property values expected to fall over the next two years, these clever folks are really getting in early and using a growing withdrawal of investor funds to try and get Government assistance before the exit becomes a flood and the funds are left illiquid and full of non-performing mortgages, or mortgages whose underlying security has slumped in value.
AXA it has a track record around the world of not supporting investment funds where there’s a flood of redemptions actually underway or threatened. It has done it here, in New Zealand and in Europe last year when the credit crunch first erupted.
The contrast with what the banks expect from ordinary home mortgagees is astounding.
Because of our local laws, banks can pursue you for monies left owing on mortgages. It’s called full recourse financing (as opposed, for example, to the non-recourse that James Packer says he has with CVC, the owner of 75% of PBL Media).
In the US, home lending is on a non-course basis in nearly every instance. It’s why home owners can walk away when they can’t pay their home loans any more or where the value of their house falls below the size of their mortgages. The keys are put in an envelope and posted to the lender in what is called “jingle mail.”
Here there’s no such luxury (which helps keep arrears and default rates low) and yet this is what the banks and others are saying and effectively doing with their mortgage investment funds by not supporting them and closing them to redemptions. It’s non-recourse to the bank or promoter of the fund and bad luck.
And the Federal Government reckons it is going to solve a difficult situation by telling the likes of the Commonwealth Bank, that the Colonial mortgage fund can get deposit guarantees by becoming a bank. That’s a mind boggling pierce of bureaucratic doublespeak, isn’t it?