Retirees Upnorth Feel Sydney's Mortgage Pain

Sydney Morning Herald

Monday May 12, 2008

Clancy Yeates

Many trusted their savings to a small, unrated mortgage business, writes Clancy Yeates.

ROLLING over a $135,000 investment with Donovan Oates Hannaford Mortgage Corporation last November seemed a good idea to Port Macquarie retirees Joan and Mick Campbell.

The company, which had its roots in a trusted local law firm, attracted 4500 small investors, many of them retirees from the region. But three months after the Campbells reinvested, their stake, along with $209 million in other investors' funds, was frozen.

The case is the latest in a series of unlisted, unrated investment schemes that have run aground. The Campbells chose to put their money with Donovan because they trusted the name of the local business, viewing it as a conservative option.

"It's an old established company of solicitors, and they have a good name in the town," Mrs Campbell said.

The firm, which lent investors' funds to property developers, used the community's loyalty to market the investment business. Its name came from Donovan Oates Hannaford Lawyers, which has operated in Port Macquarie since 1946. The lender's managing director, Peter Hannaford, was a partner in the law firm between 1971 and 2002. Another director is a former partner, and four other directors are still partners in the law firm.

The property lender organised annual seminars at the Port Macquarie branch of Panthers Leagues Club for its 1500 investors living in the area. It put on refreshments and posted photos of the construction projects to which it was lending. It also sponsored children' writing competitions, and croquet, golf and bowls tournaments in the area.

But it all fell apart on February 27, when the company announced it was going into voluntary receivership because of the falling property market. On April 2 a report by the receivers PricewaterhouseCoopers said that 27 of the 35 loans Donovan had issued were in default. Donovan had stopped accepting new investments in 2006, but some existing investors say they were unaware of problems.

The receivers, charged with selling off the company's assets, say they expect to return about 70c in the dollar to investors within three to four years. In the meantime, investors should receive monthly interest payments, they say.

Retirees Wendy and John Powell invested $130,000 with the property lender, rolling over some of these funds as recently as February this year. "Total shock was our initial reaction," Mrs Powell said. "You don't think anything like this is going to happen."

While retirees' savings languish in ill-fated projects, the receivers are busy planning the sale of the properties used as security for the loans. There are more than 300 separate units in total, mostly in the slowing Sydney market. The expected return is at the high end, the receivers say. But the question remains, how did it come to this?

The company was undone by having too many eggs in one vulnerable basket - the Sydney property market. Ominous signs included growing exposure to risky assets, declining levels of equity, and losses - but most investors were unaware of these.

The investment products Donovan offered were unlisted, unrated debentures, a similar business model to that of the collapsed companies Fincorp and Westpoint. Investors bought debentures, which could be redeemed for a higher price after a set period. Donovan lent the funds to property developers, particularly in the residential sector.

The business model ran into difficulties when the Sydney property market, where 84 per cent of Donovan's loans are held, went into decline. As the number of borrowers unable to meet their repayments stacked up, closing the company was the best option for investors, the directors said.

Risks were apparent in the lender's 2006-07 financial report. "Impaired loans", which were not in default but showing potential problems, best illustrate the firm's growing number of risky assets. The value of impaired loans almost tripled from $55 million to $154 million over 2006-07, the report shows.

In a part of the report submitted by directors, they noted that doubtful debts had grown, but that the majority of impaired loans would remain on the company's loan book until an anticipated rise in real estate values.

All up, the company made a $4.46 million loss in 2006-07, but the directors remained upbeat.

The receivers' report says $3 million in dividends was paid last June to family companies associated with each of the directors - which are the sole shareholders in the company. Directors had borrowed $6.5 million from the company and this had not been repaid in April when the receivers released the report. The receivers could not confirm when the loans would be repaid.

Joan Campbell asked the firm last year if it was in difficulty, as she had noticed it had stopped advertising. She was told: "There's no problem; we simply have enough money, and there isn't anything that we are interested in investing in at the moment."

The managing director, Peter Hannaford, after consulting with other directors, declined to answer the Herald's questions.

The case raises the well-worn issue of disclosure from small investment companies, and the practice of harnessing a law firm's name for a financial business.

In May last year the Australian Securities and Investments Commission announced a plan for investment groups to provide greater disclosure about the risks involved. In August the watchdog published a list of all 92 companies issuing unlisted, unrated debentures, including Donovan, saying that $8 billion was invested in the industry. The regulator has required issuers to increase their disclosure, but even so, many mortgage financing debenture schemes do not meet voluntary disclosure benchmarks for valuation and equity capital levels.

The regulator has found that convincing marketing attracts many investors to unrated schemes. This is what the Donovan mortgage business appeared to do. But what were solicitors doing getting into the high-risk area of lending to developers?

The law says both Donovan Oates Hannaford businesses were completely separate. When asked for comment on businesses that sprout from law firms, the Law Society of NSW washed its hands of the non-legal work of solicitors: "The management of these types of businesses does not fall within the purview of the Law Society. They are a separate entity, they are not providing legal services, and accordingly cannot be regulated under the Legal Profession Act 2004," the society's president, Hugh Macken, said.

However, investors who spoke to the Herald, felt the two companies shared a reputation for trustworthiness born out of the law firm's history in the town. Its website links directly to the mortgage business, and lists the same address for both businesses.

As receivers go about the business of liquidating properties in a falling market, investors are anxiously waiting to see how much money they will get back. In recent months a group representing investors received advice on the possibility of legal action.

As Mrs Campbell said: "It's not money we want to lose ... We've both worked hard all our lives, and if you save your money carefully, you hope to be able to use it to live on."

© 2008 Sydney Morning Herald

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