The freeze on withdrawals from mortgage funds has thawed, at least for those funds that remain open to investors. But there are still billions of dollars of retirees' savings locked up in them.
Mortgage funds took investors' money and offered them daily liquidity while lending the money to property developers and holders of residential mortgages. The mortgages were to be paid back over several years.
In normal times the liquidity mismatch is not a problem, but in October 2008, to shore up confidence in Australia's deposit-taking institutions during the worst of the GFC, the federal government guaranteed bank deposits, including term deposits, but not mortgage funds.
Many mortgage-fund investors wanted their money back to put into term deposits. But the long-dated nature of the mortgages held by the funds meant they could not raise enough cash to repay investors in full.
Most funds allowed investors to withdraw money to a certain limit once a month or quarter, or under hardship conditions, while mostly continuing to pay interest to investors.
Some funds are in the process of closing and are not accepting investor contributions.
These fund managers probably reason the sector is so on-the-nose that their mortgage funds are no longer viable.
The exit of competitor funds and tougher lending criteria for property development by banks could mean higher rates of interest for mortgages supplied by the remaining funds.
A fund analyst at researcher Morningstar, Alex Prineas, says while the returns may be higher in the future, so are the risks. Some of the funds are experiencing significantly higher arrears and defaults compared with historical norms.
Existing mortgages, which are lower-yielding than newer mortgages, will take a while to clear and be a drag on an overall portfolio's returns even if new loans are more profitable, Prineas says.
Morningstar has reviewed five mortgage funds, of which only two - the Howard Mortgage Fund and the Australian Unity Mortgage Income fund - remain open. But Morningstar has given the Howard Mortgage Fund a ''negative'' rating and the Australian Unity Mortgage Income fund a ''neutral'' rating.
There is always the risk of another spike in investors wanting their money back, and returns need to compensate investors for that risk as well as the risks of an increase in defaults.
Over most time periods, the mortgage funds reviewed have underperformed the rate of return on cash as given by the UBS Bank Bill Index or delivered only a tiny premium to cash for the added risks, Prineas says.
That's hardly a ringing endorsement for mortgage funds. What remains of the mortgage-fund sector faces an uphill battle in replacing those leaving the funds by a greater number of new investors.