Mortgage funds carrying too much risk

MORTGAGES are not only causing property buyers pain but investors in mortgage securities are also under the hammer.

According to a new report by Managed Investment Assessments, most mortgage funds which are available to the public carry too much risk.

Of the 50 mortgage funds included in its research, 70 per cent did not meet MIA's risk-for-return standards.

Only 15 funds offered an acceptable match between the risk being taken and the return being offered, according to the report.

Most of the highest risk mortgage funds were involved with property developments, construction debt, high loan-to-value ratios or mezzanine debt.

The returns being offered by these products were typically 55 to 70 per cent above the 12 month cash rate, the report said. However, in 23 out of 25 funds this was still not enough to compensate for the high risk involved.

MIA director Kate Gymer said investors in the funds also needed to consider the overall outlook for the property market.

"We remain long overdue for a correction in property values and we have retained our view from last year that this is likely to occur towards or at the end of this decade," Ms Gymer said.

"As with the previous property downturns over the past 150 years, it is expected that this one will occur in the aftermath of a fall in the stock markets of the major western economies."

This means that mortgage fund managers have ample time to plan for a general decline in property asset values, she said.

The research follows the latest ratings for Australian residential mortgaged-backed securities by Standard & Poors.

Although S&P found good news overall, with the number of arrears for prime mortgages falling slightly in the past month, there was an increase in arrears for sub-prime mortgages.

Sub-prime loans are characterised as being to people who would not qualify for a loan from one of the traditional lenders, loans that do not have mortgage insurance and loans to people with a poor credit history.

Because the borrower is considered sub prime, lenders charge a higher interest rate to make up for possible default on the loan.

The number of late payments being received for sub-prime mortgage-backed securities increased to 11.53 per cent, the third monthly rise in a row.

The uncertainty surrounding mortgage investments also comes amid bad news contained in the latest housing affordability statistics released by the Real Estate Institute of Australia and Deposit Power.

Housing affordability - or unaffordability - has turned in its worst result for more than 25 years with the exception only of the property slump in 1989-1990.

The increasing strain on household budgets to keep up repayments is also adding to concern about the attractiveness of mortgaged-backed investments and funds.

Australian households now need more than a third of their total combined income, 33.8 per cent, to meet repayments for the average home loan.

This latest REIA affordability survey was also taken before the last official interest rate rise,

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