Moneyweb’s investigations into a mortgage bond scheme in the Western Cape have revealed how for many months the company has been earning far less interest than it has been paying out. The sustainability of its operations is therefore in question.
Mortgage Secured Finance, which is facing a liquidation application in the Western Cape High Court, has also been paying interest on an amount at least double that which it claims in its court papers to owe to investors. The company did not provide an explanation for this anomaly.
Read: Where is the money?
Mortgage Secured Finance was started in 2010 by its two directors, Etienne de Beer and Willem van der Vyver. The company’s business model was to offer debt consolidation for distressed borrowers by issuing them with loans backed by a mortgage bond against their property.
The capital for these loans was raised from members of the public who were introduced to the company by a team of brokers. These ‘investors’ provided money to Mortgage Secured Finance in the form of loans, on which they earned interest of between 11.5% and 14.5%.
Their funds were paid into the trust account of law firm Bornman & Hayward Attorneys. From there they were used to issue the mortgage bonds. Bornman & Hayward itself kept a record of the bonds and the title deeds to the properties over which they were held.
The brokers, in turn, earned 3% commission up front plus an ongoing 1.5%. By any standard, this is an extremely high commission structure.
While this business model is theoretically sound because the capital invested in the company should always be secured by the mortgage bonds, liquidity was always likely to be challenging. If investors wished to withdraw their capital, the only way this could be done was either by getting in new investors to replace them or by selling the mortgage bonds to banks or other loan companies.
The mortgage bonds are not, however, always that easy to sell. Since they were given to distressed creditors as debt consolidation loans, other credit providers are unlikely to see these clients as attractive unless they have been fully rehabilitated. Some of them have also defaulted on their interest repayments, making them even less appealing, and potentially requiring Mortgage Secured Finance to apply for their homes to be sold, since the homes were security for the loans. That is not a quick or simple process.
Even more concerning than this, however, is that Mortgage Secured Finance entered into agreements with some of its investors that essentially ensured that it would run into trouble. The company allowed these investors to ‘re-capitalise’ their interest. In other words, instead of being paid out monthly, the interest due to them was added to their initial capital and would earn interest at the same rate. Effectively, this was compounding the return.
However, it appears that this interest was never genuinely ‘re-capitalised’. For that to have happened, it must have been channelled back through the Bornman & Hayward trust account so that it could be used to fund more mortgage bonds. The law firm has however acknowledged to Moneyweb that no money was ever paid from Mortgage Secured Finance into its trust account.
Where is the money?
This is significant for two reasons.
The first is that if that money was never put into the Bornman & Hayward trust account, it could never have been used to fund more mortgage bonds, and could therefore never have earned the level of interest that the company was paying. In other words, that interest on interest was only ever earned on paper.
Even more concerning, however, is that this money is no longer in the Mortgage Secured Finance bank account either. The company did not respond to Moneyweb’s request to explain what had happened to it.
Not only does this raise questions about whether Mortgage Secured Finance was misrepresenting to these investors what was happening with their money, but it must call into question the company’s ability to pay out the full amount owed to them.
If the ‘re-capitalised’ interest was never used to fund more mortgage bonds, that means it was not secured by the mortgage bonds either. So even selling the company’s entire loan book will not realise enough capital to pay investors.
Moneyweb sent an extensive set of questions through to Mortgage Secured Finance and its attorneys, Bornman & Hayward, seeking clarity on these issues. They, however, declined to comment, stating that:
“Mortgage Secured Finance is party to litigation proceedings. The High Court is the only forum in which the matters will be heard and is sub judicae. The matters cannot be traversed in any other forum or media. Our instruction is that Mortgage Secured Finance will not litigate through correspondence or via alternate forums/media.”