Mortgage fund says payment freeze ‘cautious’ amid volatility

(Bloomberg) – Lender Romspen Investment Corp. needs more time to assess the state of the housing market before it resumes allowing investors to withdraw money from its flagship mortgage fund, an executive said.

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“You have to take careful steps to protect the fund,” managing partner Derek Jenkin said in an interview. The Toronto-based company told investors this week that it will temporarily postpone redemptions in the Romspen Mortgage Investment Fund until there is “more clarity” on when borrowers will be able to repay loans or assets can be sold to free up cash. Romspen’s business is lending secured against real estate, including construction.

The payout freeze means investors in the C$2.8 billion ($2.1 billion) fund who recently requested to redeem units will not be paid on Nov. 15 as scheduled.

The halt is simply a matter of short-term liquidity, Jenkin said. There is a cash flow mismatch as Romspen has obligations to its borrowers, as well as a queue of investors looking to withdraw money from the fund. In addition, some borrowers have halted interest or principal repayments as rising interest rates create uncertainty about the viability of some residential and commercial projects.

Romspen therefore needs a “moment of pause” to assess things, said Jenkin, who did not give an estimated date when the fund could resume redemptions. The company also limited takeovers after the Covid-19 shock, but was back to normal within about six months, he said.

Halifax to Honolulu

“Our investors are at no risk of loss,” Jenkin said. “It would take a dramatic change in real estate valuations from Halifax to Honolulu for us to see a significant decline in investor capital. If this were to happen, it would have happened during the pandemic. The company lends at 65% loan-to-value, so prices need to drop significantly before its money is at risk.

Private loan funds have grown in popularity among investors looking for yield in the era of ultra-low interest rates. But mortgage finance vehicles have had a tough year, with the sharp rise in rates causing disruption in property markets.

In September, Romspen announced the creation of a “trickle pool” for investors who want to cash out when selling fund assets. Investors with around C$115 million have accepted the offer, Jenkin said, and they will start receiving cashback early next year.

But the existence of the pool has not dampened regular redemption requests – forcing Romspen to act this week to stop payments, for now.

Jenkin said he was increasingly optimistic about the market turnaround: Over the past few weeks, Romspen has begun “to see significant increases in closed deals, whether in the sale of real estate or the repayment of borrowers,” he said.

Romspen’s smaller U.S. mortgage fund “has been an absolute gem” during that time, Jenkin said. This product is focused on providing short-term loans to real estate developers, with about half of the funds lent to projects in Florida and Texas.

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