By NEIL HARTNELL
Tribune Business Editor
The Government’s revised Mortgage Relief Plan (MRP) fails to “address the underlying structural causes” of the crisis, Opposition politicians charged yesterday, urging it to instead focus on “big ideas”.
K P Turnquest, the FNM’s deputy leader, told Tribune Business that the Christie administration needed to direct its energies to examining interest rate spreads and the Bahamian Prime Rate, plus consumer protection legislation.
He argued that the moribund economy and a near-15 per cent unemployment rate, coupled with high borrowing (interest rate) costs, lay at the heart of problem that has resulted in $670 million worth of Bahamian mortgages falling into arrears.
Mr Turnquest was backed by Branville McCartney, the Democratic National Alliance’s (DNA) leader, who also implied that the Government’s revived MRP was a ‘band aid’ solution at best.
He called on the Government to introduce legislation requiring commercial banks and other lenders to permit borrowers, who had been current for many years, to use the equity built up in their homes to refinance and retain their properties.
The Government’s new MRP version has allocated $20 million, over a four-year period, to fund ‘financial inducements’ to the commercial banks that - in theory - will encourage them to place as many delinquent borrowers as possible into the new scheme.
Expressing scepticism that this would make a significant dent in the 4,000-plus homeowners with delinquent mortgages, Mr Turnquest said: “It doesn’t address the underlying structural problems of mortgages, which is the cost of lending and borrowing, coupled with an economy that’s been in contraction for the last two years.
“To the extent that the Government gets involved, it should look at big ideas that are sustainable. Look at the Bahamian Prime rate, look at consumer protection legislation, look at the interest spreads between the cost of funding, money for the banks, versus what they are lending money at.”
The Bahamas is widely viewed as having some of the widest spreads between bank deposit rates (what they pay savers to attract funding) and mortgage, consumer and other lending rates (what they charge borrowers for lending capital).
CIBC’s, in its Caribbean Market Overview for the 2016 first quarter, said Bahamian commercial bank interest spreads continue to widen, growing by 74 basis points (0.74 percentage points) in the year to end-March 2016.
The average lending rate grew by 40 basis points to 12.1 per cent, while deposit rates dropped a further 34 basis points to 1.34 per cent.
Mr Turnquest yesterday described the 10.76 percentage point difference as “huge”, and added: “Those who understand a bit about risk, country risk and political risk, may say there is a case for the banks to have a risk premium in developing countries.
“But it cannot be so significant that there’s effectively a doubling of lending rates between what they lend at home, and what they lend at in the Bahamas.”
Mr Turnquest also warned that there was “a tremendous risk” that the revived Mortgage Relief Plan, as presently structured, created “a tremendous risk” of moral hazard entering the Bahamian housing and mortgage markets.
The Government has attempted to prevent this by introducing a May 1, 2016, ‘cut-off’ as to which delinquent borrowers can qualify for the plan, but Mr Turnquest said the introduction “of government and politics” into mortgage contracts threatened to encourage more people to default in the hoping of benefiting from lower payments via the MRP.
“The Government coming in and trying to be ‘Big Brother’ to everybody is introducing a new degree of risk,” the FNM deputy leader added.
Still, Mr Turnquest agreed that the banks “have to take some risk and put some skin in the game” if the Bahamas is to work its way out of its mortgage crisis.
“If we’re going to get through this period, it’s going to take sacrifices on all our parts,” he added, suggesting that all parties - lenders, borrowers and the Government - may have to take a “haircut” in the short-term for long-term gain.
Mr McCartney, meanwhile, told Tribune Business: “I don’t understand why the Government doesn’t make legislation that if a person has been paying their mortgage for 15 years, and defaulted in the last three to six months, that the equity they’ve gained as a result of making all those payments ought to be used prior to any foreclosure proceeding.”
The DNA leader said that a borrower with a 25-30 year mortgage would have built up significant equity over the first 15 years.
He argued that this would enable the mortgage to be rewritten, or restructured, in such a way that the borrower would be able to keep their home.
“You ensure that persons who have gotten equity in their property as a result of payment over the years would, prior to initiating foreclosure proceedings, be able to renegotiate or refinance their loan,” Mr McCartney told Tribune Business.