Farrow Relied Too Heavily On 12 Main Borrowers, Says Report

The Age

Friday November 27, 1992

SIMON MANN

Losses by the Farrow group are expected to exceed $1 billion. reports on the main causes.

A telling factor in the Farrow group's demise was its reliance on a core of 12groups of related ``individual and corporate borrowers" who accounted for loans of $565million _ more than 20per cent of the group's total.

Nearly all were ``capitalised-interest" loans in which interest was allowed to accumulate and added to the principle owed.

Based on the current estimates of the liquidator of the building societies, Mr Tony Hodgson, losses on these loans are likely to top $370million, more than one third of Farrow's total.

In his latest report, issued yesterday, Mr Hodgson chronicled a series of these big loans which illustrated how the societies _ Pyramid, Geelong and Countrywide _ strayed alarmingly from their bread-and- butter home mortgages. Increasingly, Melbourne's central business district and its fringes, Sydney, the Gold Coast and Cairns, including ``beachfronts" and ``swamp sites", became repositories for Farrow money.

He also condemned the group's over-reliance on fee income, its ``non- recognition of losses", the transfer of problem loans between group entities and a range of ventures undertaken by various Farrow companies. He said ``little regard" appeared to have been given to providing adequate or up to date financial information from borrowers.

Some examples of the key loans that went sour were: A $20million-plus advance to partly purchase and refinance a resort development site in Northern Queensland. The loan, which exceeded 100per cent of the value of the security, was intended for one month while the borrower refinanced. This failed, however, and the societies are now in possession. The principal is lost, as is interest which had been recorded as income.

A $20million advance for the purchase and development of a CBD transport terminal and car park, apparently approved on the basis of the borrower's future projections of the value of the property. Loss: $15million-plus.

A $20million advance for the purchase of a CBD site and building of a 12-storey office block which has never been tenanted. Loss: $20million plus interest.

The liquidator said the examples were not isolated: ``The majority of the societies' losses are directly attributable to this type of speculative lending".

Mr Hodgson said the Farrow group's switch to commercial lending was its downfall. Initially, the group appeared to prosper in the property boom. As a result, fee income grew from $4.8million in 1986 to more than $42million in the year to June 1990 as the societies' lending exploded.

The problem, however, was that the societies, which charged high up- front ``establishment" fees, nearly always advanced the fee money to the borrowers.

These fees were recorded as income, used to calculate operating profits, even though the money had not been paid by the borrower. In fact, says the report, of the $42million in fees recorded in the 1989- 90 year, less than $3million was paid by borrowers in cash.

This had devastating implications for the group's accounts for the six months to 31December, 1989. It reported a $12million profit with establishment fees, recorded as income, totalling $31million. But of this, just $1million was paid in cash.

Mr Hodgson said another practice involved transferring mortgages between Farrow entities.

One example was when Countrywide ``purchased", in December 1988, a big loan from Pyramid at full value of $15million. It paid cash. The loan comprised almost 10per cent of Countrywide's total assets and was more than double its shareholders' funds.

The loan was ``repurchased" by Pyramid in March 1990, as part of a transaction involving mortgages worth $25million. As consideration for this transaction, Pyramid transferred to Countrywide loans instead of cash.

``The net effect of these transfers was that Pyramid received $15million of Countrywide's cash and Countrywide ended up with loans, one of which was a loan on which a major ($3million) loss has been incurred," he said.