Mortgage Trusts Hold Up Amid Virus Crisis

Mortgage Trusts Show Resilience Amid Economic Uncertainty

The Australian mortgage trusts sector, now surpassing $15 billion in funds under management, has demonstrated remarkable resilience despite economic uncertainty. Unlike the turbulence experienced during the global financial crisis (GFC), current data indicates that mortgage trusts have maintained low arrears and bad debts, with non-performing loans accounting for less than 2% of the total loan book【Source: AFR – Nick Lenaghan, 2020】.

In a Changing Market

Mortgage trusts operate by pooling unitholders’ capital to invest in property-backed loans, typically structured as either:

• Contributory mortgage funds, where investors acquire fractional interests in specific mortgages.
• Residential mortgage-backed securities (RMBS) funds, which contain tradeable mortgages issued by banks and financial institutions.

Most mortgage trusts focus on interest-only loans, with lending standards significantly improving since the GFC. According to SQM Research, lending criteria have become more stringent, reducing negative refinancing risks. While some borrowers have faced forced refinancing, the sector’s overall loan-to-value ratios (LVRs) remain conservative, providing a buffer against potential downturns【Source: AFR – Nick Lenaghan, 2020】.

Lending standards in the sector have improved considerably since the GFC, says SQM’s Louis Christopher. Peter Rae

Why Mortgage Trusts Are Performing Well in 2020

Despite the economic impact of COVID-19, SQM Research’s Managing Director, Louis Christopher, reports that mortgage trusts have not experienced significant outflows. Distributions have remained steady, contrasting sharply with the GFC when widespread redemptions forced many trusts to suspend distributions【Source: AFR – Nick Lenaghan, 2020】.

Key factors contributing to the sector’s stability include:

• Tighter lending standards, ensuring quality loan origination.
• Lower loan-to-value ratios, offering a buffer against market volatility.
• Improved risk management, reducing exposure to distressed refinancing.

However, elevated-risk funds—particularly those with high exposure to construction loans—have seen slightly higher arrears. This highlights the importance of selecting mortgage trusts with robust credit assessment practices.

The Role of Mortgage Trusts in Investment Portfolios

For investors seeking income-generating, asset-backed opportunities, Australian mortgage trusts remain an attractive option. The combination of consistent returns, disciplined risk management, and diversification positions them well within a balanced portfolio. As the sector continues to evolve, careful selection of funds with proven track records and conservative lending strategies will be crucial to mitigating risks while capitalising on growth opportunities.

For more details, read the original article on the Australian Financial Review by Nick Lenaghan, published on May 14, 2020.