Contributory schemes—Govt role

Press, 2 September 1986, Page 30

Contributory schemes—Govt role

This article, on contributory mortgage schemes and the role of the Government in the protection of investors, was specially written for “The Press" by Mr M. J. G. Mclntosh, of Auckland, chief executive officer of Allied Mortgage Guarantee Company, Ltd, an associate company of NZI Corporation, Ltd.

The recent failure of two contributory mortgage broking operations in Christchurch and Hamilton has put at risk investor funds which could total between $9 and $l4 million.

Meetings in Christchurch and Hamilton of the investors associated with the failed companies have drawn attention to the lack of legislation to protect those who invest in contributory mortgages. The Hamilton group wants the Justice Department to investigate the affairs of the failed broker company, pursue the question of long overdue legislation, and have the department reimburse the losses they have suffered. Although the first two requirements may well be appropriate, it is unlikely that there will be much sympathy for the notion that the state should “pick up the tab” for the consequences of imprudent investment.

It is true that regulations to be brought in under the Securities Act, 1978, have been in draft form for nearly six

years. There have in fact been four drafts upon which interested parties have made widespread submissions. The Securities Commission, to whom the submissions were made are understood to have completed their work on the Fifth Draft, which now lies in the hands of the Government Law Drafting Office where it has apparently been accorded low priority given the burden facing that office at present. The Official Assignee in Hamilton is reported as saying that further investigation into the broker’s affair would be highly complex and costly and his department is already overburdened. We ccan fully support his recommendation to prospective investors to carefully read the fine print when considering investment in contributory mortgage schemes, which often carried high risks. Had the Contributory Mortgage Regulations been in place, those who are in the business of soliciting funds from the public for the pur-

poses of investment in contributory mortgages would have been obliged to conform to a minimum level of disclosure •to intending investors. Information concerning the ability of the borrower to ■meet payments on the loan, the value of the property, by whom valued and when, together with details of any other encumbrances against the title would be available, along with financial information concerning any guarantor or insurer of the mortgagor’s obligations. I addition, investors would have to be informed if any funds raised were to be loaned to any

company or individual related to the broker or his company. In the absence of these regulations, mortgage broekrs are restrained in their activites only by the Code of Advertising Practice under •the Securities Regulations. In essence therefore, anyone can become a mortgage broker, have no legal requirement to issue anything remotely like a prospectus, can offer whatever rate is considered likely to attract the public’s funds, which are then on-lent to those borrowers who are prepared to pay a related rate. In the case of our own company, we have for many years ocnducted our business as if the missing regulations were in fact in place thus making full disclosure to all intending investors before the acceptance of their funds. Unlike most mortgage brokrs, A.M.G’s mortgage banking operations prohibit funds being accepted from investors until a mortgage has first been advanced by

A.M.G. from its own resources.

In the case of the Christchurch broker, rates as high as 28 per cent were being offered to investors in a climate of falling interest rates. The broker subsequently found difficulty in attracting borrowers who were prepared to pay such high rates. As interest on “call deposits” also rapidly fell, the margin between the rate payable on the broker’s trust account and that to which he was committed to pay the investors widened. In those circumstances, it was the substance of the broker which guaranteed the difference and as events revealed, the substance was not there.

With the probable losses now facing a considerable number off investors throughout New Zealand who have placed funds into the hands of failed mortgage brokers, we can only hope that there will be some elevation of priority in the formal implementation of the Contributory Mortgage Regulations.