The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An estimated 20 per cent of delinquent Bahamian mortgage borrowers fall into the ‘can pay but won’t pay’ category, a situation the banking industry believes will be exacerbated by the Homeowners Protection Bill.

A paper written by a Bahamian banker on the Bill’s likely impact, which was shared with Tribune Business on condition of anonymity, says its passage into statute will increase ‘moral hazard’ among Bahamian homeowners.

The paper argues that by injecting the Bahamian court system into the process, and making it more difficult for commercial banks to secure loan collateral, borrowers will have a greater incentive to willingly default - secure in the knowledge that the lender will have great difficulty in selling their homes.

Michael Halkitis, minister of state for finance, yesterday denied that the Bill would create so-called ‘moral hazard’ when he introduced it in the House of Assembly for its second reading.

He said it was designed to help only those Bahamians who were no longer able to pay their mortgages as a result of unemployment, chronic illness or underemployment.

Mr Halkitis argued that it was not intended to “pay people’s bills”, but the draft Bill tabled in November 2012 allows a court to postpone the sale of a delinquent property for up to one year - subject to certain conditions.

The banker’s paper, arguing that the Homeowners Protection Bill would essentially alter the terms of an already-signed contract between lender and borrower, said: “The lenders run the very real risk that the remaining mortgagors will never make an effort to pay, using any surplus cash flow for consumable items. Indeed, there are delinquent mortgagors who choose not to pay........

“The mere fact that mortgage contracts might be changed and applied retroactively to all existing mortgages has caused the number of Bahamians delinquent on their mortgages to shoot up.

“The increase in delinquencies was driven, in part, by some who were gaming the system in the hope of benefiting even if they had an ability to pay their mortgage.”

And the banker’s paper added: “There is no doubt that the passing of the ‘Home Owners Protection Bill’ will likely further increase delinquencies as homeowners decide to take advantage of the legal process and the delays provided by the Bill.

“That’s financial speak for ‘people think they can get away without paying their mortgage because they know they can live in the property for ‘free’”.

Acknowledging that many distressed borrowers had lost their jobs, the banker’s paper added: “Many of the delinquent mortgagors are not unemployed – they simply have decided that they have other priorities, including paying their credit card balances, car loans and borrowing for vacation.

“But these are the same people who are included in the broad-based ‘Home Owners Protection Bill’ initiative. Perhaps 20 per cent of Bahamians who have fallen into arrears on their mortgages have done so ‘strategically’. That is they can afford to pay, but just aren’t.”

The paper added that Bahamian commercial banks had “done a fair job” in pricing and assessing the borrower’s risk, but conceded that the industry may have got carried away and been “swept away in the pre-recession euphoria”.

This resulted in them lending “more money than they prudently should have to borrowers, some of whom had marginal creditworthiness”.

Between December 2005 and December 2012, Bahamian commercial banks advanced $1.2 billion in residential mortgage loans, taking the total outstanding to $3 billion.

“During the same period, mortgage arrears (defined as loans over 30 days past due) soared from 8.8 per cent to 22.6 per cent, and non-performing loans or NPLs (defined as loans over 90 days past due) jumped from 4 per cent to 16.1 per cent,” the banker’s paper said.

“The dollar amounts these percentages represent are staggering – loan arrears are in the region of $700 million, and NPLs are about $500 million.”

As to the implications, the banker added: “As is clear, this growing pile of defaulting home loans holds many risks for the Bahamas. For one, it is choking off the flow of capital to the economy. And recovery from this deep recession is critical upon credit availability.

“The other risk is that if lending continues, it will be on much more robust underwriting standards, including significant deposits and potentially higher rates to compensate for increased risks. This will squeeze out marginal borrowers, who form the bulk of the voting public.

“The launch of the credit bureau will also accelerate the adverse selection, with only creditworthy borrowers being able to access credit at present rates and the remaining majority having to pay a premium.”

The paper continued: “Banks are supposed to be good at allocating capital efficiently. They take the unused savings of society and channel them towards productive uses.

“But if banks are forced to start practicing widespread forbearance and ever greening of delinquent loans (which is certain to happen under the proposed under the ‘Home Owners Protection Bill’), they become less and less efficient at their jobs because so much of their capital is tied up in bad loans instead of getting put to good use.”