Investing In Mortgage Loan Funds

Mortgage Loan Funds invest in or otherwise provide loans that are secured by way of a 1st registered mortgage over real estate. In many cases, the Fund’s activities are restricted to lending against the value of an income-producing real estate, such as factories, offices and distribution centres.

The main problem I have with these Funds is the mismatch between the term of the Fund’s investments (the mortgages) and the investor having a periodic right to redeem his/her investment, often a right which could be exercised at the end of each quarter. The problem arises when the dollar value of withdrawals during any period exceeds the additional amount invested over that period. In order to satisfy the withdrawal requests, the Fund Manager needs to either borrow against the Fund’s assets (thereby increasing the investor’s risk and only until predetermined thresholds have been reached) or sell the mortgage loans to another party.

Even in the best of times a forced seller does not usually get full value for the asset being sold. In tough times (in this case where there is a general withdrawal from Mortgage Funds) it is much more difficult to find a buyer and if one does find a willing buyer the sale/purchase price will probably be at ‘rock bottom’ levels. In this case, the investors collectively would probably decide that it is in their best interest not to sell the Fund’s assets, leaving the withdrawing investors unsatisfied and effectively locked in to their investment.

Mortgage Loan Funds were popular amongst income focused investors prior to the GFC in 2007/2008. Since then many (if not most) have been wound up or are still in the process of being wound up.

Prepared by: Mark Morris