By NEIL HARTNELL
Tribune Business Editor
Home loan costs and accessibility could largely depend on how the courts interpret the proposed Homeowners Protection Bill, the Clearing Banks Association’s (CBA) chairman warned yesterday.
Ian Jennings, who is also Commonwealth Bank’s president, told Tribune Business that his own institution viewed the legislation, tabled in Parliament yesterday, as “changing the risk profile of mortgage financing”.
He said Commonwealth Bank, and all other Bahamas-based commercial banks, would now have to each determine whether this impact was “material” enough to spark an increase in mortgage lending rates and/or a tightening of their borrowing criteria.
Suggesting that the latter could involve requiring borrowers to come up with higher downpayment or equity contributions, Mr Jennings emphasised it was “too soon” to determine the Bill’s impact on the mortgage and housing markets.
He disclosed that based on the draft Bill tabled in the House of Assembly, the Government had accepted many of the Association’s recommendations.
However, it had rejected the banking industry’s call for the foreclosure and ‘power of sale’ cases created by the Bill to be heard by a specially-empowered Tribunal, rather than the already-overburdened court and judicial system.
The Bill inserts the courts into the foreclosure and ‘power of sale’ process, requiring lenders to give delinquent borrowers 30 days’ notice before either invoking their ‘power of sale’ under the mortgage or seeking a court-approved foreclosure.
In both cases, borrowers can apply to the Supreme Court for relief. On the foreclosure process, the court can either adjourn, stay or suspend the matter if it believes the borrower will be able to pay principal and accrued interest within six months.
As for the ‘power of sale’, the latest version of the Bill allows the court to postpone this for “a reasonable period where a sum equal to at least one half of the principal, and accrued interest, has been paid at a specified time”.
“Part of our challenge will be that where there are areas in the Bill that give power to the courts, we’ll have to wait and see how the courts interpret certain things to see what the impact will be,” Mr Jennings told Tribune Business.
He pointed, in particular, to the Bill’s clause nine, which empowers a court to prevent a bank exercising its ‘power of sale’ for “a reasonable time”.
“If you look at the wording, there are things in there that strike the balance, but it comes back to the court’s interpretation,” Mr Jennings said.
“The court may set timeframes they think are reasonable. It comes down to interpretations of what ‘reasonable’ means. Until the courts set that precedent, we can’t comment on that.”
Mr Jennings added that it would be up to each individual commercial bank and lender to determine its own position on whether the Bill will increase the risk associated with mortgage lending.
“To us, we would perceive it as changing the risk profile of advancing mortgage financing,” he told Tribune Business of Commonwealth Bank.
“The question is: Is it a material event? We’ll then have to determine how we respond; whether there’s no change; a change in pricing; or an increase in the equity requirements.
“It’s really too soon to determine what the impact will be. We’ll have to see how the market responds.”
Mr Jennings said the tabled Bill’s contents showed the Government had not accepted the banks’ recommendation that a Tribunal, either newly-created or an existing one, hear mortgage-related cases rather than the courts.
He questioned whether a specific court, or time, would now be dedicated to hearing these matters, “as timing is important for lending institutions when dealing with the recovery of collateral”.
The Government’s rationale for developing the Homeowners Protection Bill is that it will make delinquent Bahamian mortgage borrowers more secure in their homes, with all the attendant social and economic benefits that will bring if they can restructure their loans.
However, Mr Jennings’ comments indicate that the ‘unintended consequences’ identified earlier this week by K P Turnquest, the FNM’s deputy leader, are very much in play where the banks are concerned.
For the Bill threatens to increase the costs, time and difficulty incurred by banks in repossessing mortgage collateral - usually the homes and businesses subject to the original loan.
With a higher risk now associated with mortgage lending as a result, the banks - as indicated by Mr Jennings - may both hike interest rates and refuse to grant new Bahamian loan applicants access to credit.
Besides impeding Bahamian dreams of home ownership, this would further depress an already-struggling housing market, and negatively impact industries that rely heavily upon it, especially the construction, real estate and legal sectors.
Mr Jennings yesterday praised the consultation process over the Bill, which had been ongoing between the banking industry and Ministry of Finance ever since the first version was withdrawn from Parliament in 2013.
Yet he added that the debate had been “based on a false premise”, which was that Bahamian homeowners were losing their life’s biggest investment after missing just one or two payments.
“In most cases, homes are being foreclosed or sold after a very long period of non-payment by customers,” Mr Jennings told Tribune Business.
“When this issue of mortgage relief started before the last election, the perception was that persons would miss one or two payments and lose their home.
“That was never true, so the framework for the discussion to some extent has been on a false premise. The banks, as large financial institutions, should act responsibly, and the Government should recognise the importance of separately negotiated commercial transactions without adversely impacting that, because then you undermine the commercial framework.”
Mr Jennings said the penalties in the Bill, capped at $200,000 for a lender and $100,000 for a director, “seem very high”, while the absence of regulations was causing further concern because these often contained the enforcement ‘teeth’ for legislation.
He added that what was required was an “equitable” that struck a balance between the Government’s desire to better protect struggling homeowners, but without making it unattractive for banks to lend mortgages.
Bahamas-based commercial banks and other mortgage lenders will likely require little incentive to further withdraw from the mortgage market, given the persistently high level of ‘bad’ loans (around $600 million) that they have had to endure since the 2008-2009 recession.
That number reduced by $176.2 million or 25.3 per cent in 2016, largely due to the sale of a non-performing portfolio to Sir Franklyn Wilson’s Gateway Financial, but institutions such as Fidelity Bank (Bahamas) have almost totally pulled back from mortgage lending.