'Mortgage Collapse Worse Than Greece'


Tribune Business Editor


Rattled Bahamian commercial bankers were last night nervously awaiting today’s tabling of the Homeowners Protection Bill in Parliament, fearing it will further depress economic recovery and a mortgage market that has already “collapsed”.

A paper on the Bill’s impact, produced by a top Bahamian banker, said that with “more than 20 per cent” of Bahamian homeowners either behind on loan payments or effectively in ‘foreclosure’, the only true comparison to this nation’s mortgage crisis was Ireland.

The banker, who requested anonymity in sharing his ideas with Tribune Business, noted that one factor behind Ireland’s mortgage arrears was the fact it “is one of the hardest places in the world” for banks to repossess mortgage collateral - the exact same thing that the Homeowners Protection Bill is seeking to do in the Bahamas.

Noting that 16.1 per cent of all Bahamian mortgage loans were non-performing as at end-December 2012, the banker wrote that this delinquency level was more than three times’ that of Greece - an economic basked case that has had to be bailed out by the International Monetary Fund (IMF) and European Union (EU).

The paper added that the Homeowners Protection Bill, which aims to “limit” Bahamian banks’ ability to secure mortgage collateral and/or sell it, fundamentally changed the risk/reward assessment the industry used in determining whether to grant credit.

As a result, Bahamian commercial banks would become more risk averse when it came to mortgage lending upon the Bill’s passage.

This not only threatened the Bahamian home ownership dream with marginal borrowers denied credit, the banker’s paper warned, but would in turn depress both the vital real estate and construction industries.

This would inhibit the Bahamian economy’s ability to escape recession, the banker added, noting that Central Bank of the Bahamas data showed the mortgage market had already “collapsed” - with net new advances for mortgages standing at $0 for both the December 2012 and March 2013 quarters, a six-month period.

Separately, other high-level banking sources yesterday expressed concern to Tribune Business that few, if any, of the recommendations made by the Clearing Banks Association (CBA) appeared to have been incorporated into the draft Bill likely to be laid before Parliament.

“They’ve [the CBA] been told, or made to believe, the Bill will be tabled today, and the concern is that a lot of their recommendations were not taken into consideration or did not find their way into the Bill,” one source told Tribune Business.

“A lot of what the CBA had recommended was not incorporated into the final draft of the Bill. It appears that the Government have their minds fixed on certain matters, and no matter what discussions take place, those recommendations are not favoured.”

The source added: “There’s some significant concerns if that is the final version to be tabled. It could have some significant implications as to how credit is conducted going forward.

“It may be much more difficult to lend. It may support the non-traditional bank lenders, helping them to find opportunities to extend credit to people not qualifying with the commercial banks.”

Dr Bernard Nottage, leader of government business in the House of Assembly, last week announced that the Homeowners Protection Bill would be tabled in the House of Assembly today, although it is unclear whether the legislation will make it to a Second Reading (debate).

Still, with the Bill granting the courts the power to postpone the sale of a mortgage property in default for up to 12 months, the banker’s paper said the risks associated with Bahamian home lending would increase, while the rewards decreased.

Pointing out that credit fuelled both consumption and investment, the latter creating jobs and economic growth in the Bahamas, the banker’s paper said: “Any steps that the Government takes that heighten lending risk, or reduce risk adjusted returns, will cause lenders to pull back.

“And the Government’s (and its allies) rhetoric is consistent with that outcome. It allows the Government to deflect any criticism for the lack of employment opportunities and focuses the population’s ire on the despised banking industry. It may be a popular political move but it is a poor economic play.”

The banker said the ultimate effect of the Homeowner’s Protection Bill, as is, will be to change the terms of the lender-borrower contract once the mortgage goes into default.

“It limits the lender’s contractual rights to seize the collateral or sell it, and interjects a legal process where the courts can, upon an application by the delinquent mortgagor, require the lender to provide additional ‘reasonable’ time to allow the mortgagor to become current on payments,” they added.

Yet with more than 80 per cent of delinquent Bahamian mortgage holders still occupying their homes, often for up to two years, the banker said the Bill was dealing with a problem that did not exist.

“This Bill presupposes that the lender is anxious to seize the collateral, or sell it, and can recover the principal balances,” the banker’s paper said.

“In a market where there are few, if any, ‘qualified buyers’ and nearly 4,000 delinquent homes, this tactic is not even in the top ten desirable options that a lender faces,” the banker said.

“The best option for the lender is generally to allow the delinquent mortgagors’ time to resolve their financial problems, to restructure the loan in the meantime, and allow them to live in their homes to prevent it being vandalised. This is not charity – it simply is financial sense.”

The banker’s paper said more than $4 million in monthly principal and interest payments was not being collected by Bahamian banks, given that 16.1 per cent of mortgage loans were in default, and 22.6 per cent in arrears.

“What this means is that over 20 per cent of Bahamian homeowners are in some kind of trouble, either behind on payments, or in foreclosure or in forbearance, which is when the lender isn’t collecting payments,” the banker’s paper said.

“Only the mortgage arrears in Ireland are comparable to those in the Bahamas. Greece is in an even worse economic crunch than the Bahamas - unemployment is at 27 per cent. The economy has shrunk by 25 per cent since the end of 2007. And even so, the percentage of Greek mortgages 90 days or more past due was only 5.1 per cent in November 2012.”

The banker added that the “disparity” between Greece and Ireland was caused by the latter’s policies that prevented banks from easily taking possession of delinquent mortgage collateral.

Turning to the Bahamian situation, the banker added: “During 2012, domestic banks increased their provisions for loan losses by $73 million, or 24 per cent, to $374 million. Banks also wrote off an estimated $225 million in delinquent loans.

“The growing delinquencies, write-offs and additional loan loss provisions have decimated bank earnings and bank capital. This has resulted in a growing risk aversion and pull back in lending to segments that show greater risk and lower returns.

“The Bahamian mortgage sector meets these criteria and, in the last few months, net new advances for mortgage loans have collapsed as lenders pull back to repair their balance sheets and restore their capital. There is a domino effect to this decision – homes cannot sell, prices decline, realtors, developers and builders all suffer and cut back. Ultimately, the businesses that depend on consumer spending – restaurants, stores, cinemas etc. all suffer.”

The banker warned that exacerbating this situation, as the Homeowners Protection Bill threatened to do, could “choke off the flow of capital to the economy” upon which recovery from the 2008-2009 recession was dependent upon.


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