GSI mortgage fund risks ‘inherent’

RELATED COVERAGE: Anxious wait for concerned investor

Local investors who put their life savings into embattled mortgage fund Gippsland Secure Investments may not have been fully aware of inherent risks in the venture, according to a local financial advisor.

GSI informed about 3500 investors late last week they would not be able to access or move funds, as it undertook a review of its $150 million loan portfolio, hit by asset write downs on loan securities and defaults on loan repayments.

In a statement released last week the company foreshadowed an impact on its total asset values, after new valuation data in the review identified an increase in loan payment shortfalls.

While requests for an interview from numerous Gippsland and Melbourne-based financial advisers on the issue were unsuccessful, many spoke off the record of a reluctance to advise clients to invest in mortgage funds, due to their “inherent” risk factors.

One Gippsland-based adviser, who has been working in the industry for 15 years, said many individual investors did not understand the complexities behind mortgage funds.

“As financial advisors, we can’t see what’s happening behind the scenes; to which companies are being loaned investors’ money, and what properties they are using as security against the loans,” the advisor said, speaking to The Express on the condition of anonymity.

The source said businesses would often apply for loans from mortgage funds such as GSI at higher interest rates after being initially declined loans from banks.

“Why would a business go to a mortgage fund if they could get money at lower rate, so if the bank won’t loan to these companies, you need to ask how secure their property and land assets are – quite frankly it’s just not worth the risk,” the source said.

However GSI spokesman Steve Murphy said the company had always disclosed its risk profile to clients.

“GSI has always met its obligations in respect to disclosure and risk profile, it is publicly and clearly stated in our documentation; if you look on our website it says it clearly,” Mr Murphy said.

However Mr Murphy was unwilling to indicate how far default levels had moved from January, when loan impairment values were last published in its most recent prospectus, which is now under review.

“While there’s plenty of people who have been happy to speculate (on impairment levels), we are just not going to go there before the review,” Mr Murphy said.

According to its now redundant 2013 prospectus, 15 GSI loans, totalling $11.4 million, were in default, up from $2.21 million in 2010, equating to 9.6 per cent in value of total loans made by the company.

GSI had also commenced legal action against eight loans in default, as part of a recovery action in regards to $8.8 million, with one company owing $3.57 million secured against three individually titled residential units and vacant land.

Mr Murphy said investors were likely to be updated on the company’s financial standing tomorrow.