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Delinquent Homeowner Law's $500m 'Bottleneck'

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Gowon Bowe

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Commercial banks are working with the government to remove “bottlenecks” to cutting the industry’s $500m “bad loan” pile that stem from existing protections for delinquent homeowners.

Gowon Bowe, the Clearing Banks Association’s (CBA) chairman, this week confirmed to Tribune Business that the industry is working with the Ministry of Finance on a review of both the Homeowners Protection Act and the Mortgage Relief Plan that were initiated under the former Christie administration.

While emphasising that mortgage lenders recognised the necessity of safeguards for “the less fortunate”, Mr Bowe suggested the balance had tilted too far in favour of delinquent borrowers to the extent it was complicating bank efforts to address the sector’s $502m in non-performing loans.

He argued that The Bahamas had “put the cart before the horse” by providing more rigorous legal protection for homeowners while neglecting the need to modernise a Bahamian bankruptcy regime that remains in the 19th century.

The Clearing Banks chief argued that the strong bankruptcy laws accompanied homeowner protection regimes in the US, Canada and Europe, but the Bahamian version had neglected the unintended “economic consequences” by focusing solely on the social benefits.

The International Monetary Fund’s (IMF) just-unveiled financial sector assessment, he added, had shown the value of addressing “the dark cloud” of non-performing loans - credit that is 90 days or more past due - before The Bahamas suffered another external shock via a global recession or hurricane.

The fund’s report warned that non-performing loans remained high at nine percent of all outstanding credit to Bahamian households and businesses, with mortgages accounting for more than 60 percent of the total, and Mr Bowe said the greater difficulties created by the Homeowners Protection Act when it came to repossessing distressed properties was one of the causes.

Describing non-performing loans as “the bane of our existence”, Mr Bowe told Tribune Business: “The Homeowners Protection Act is in review between the Ministry of Finance and the clearing banks. We are working together in this regard to say what is an acceptable solution.

“Homeowners protection exists in the US, Canada and Europe, but it also comes along with modern bankruptcy laws. In The Bahamas we put the cart before the horse by having protection but no modern bankruptcy laws.... We put it all in favour of the delinquent borrower.”

Mr Bowe said it currently made little sense for banks to initiate bankruptcy procedures against delinquent residential mortgage borrowers because their home, as their primary asset, would be protected.

“A number of matters need to be resolved between the clearing banks, all mortgage lenders and the Ministry of Finance,” the Clearing Banks Association chairman added. “These efforts are progressing. In reality, I think we will have a resolution within this calendar year.”

Mr Bowe then revealed that the Mortgage Relief Programme, which he branded “a noble idea”, was also being subjected to similar scrutiny by the Ministry of Finance and banking industry due to the “moral hazard” it created for delinquent borrowers.

“When you have the Government intervening to provide limited contributions on the mortgage payment it creates the perception that any delinquent borrower does not have to pay; the Government will help me out,” he told Tribune Business. “That is already something under review by the Ministry of Finance and clearing banks.

“In the Budget debate they questioned the effectiveness of it because the banks were already doing 90 percent of what the Mortgage Relief Programme was intended to do. We have to be careful with government policy that has social safety nets being imposed and the economic consequences of those policies.

“We want to ensure those challenged and less fortunate have protection, but we don’t want to create challenges through putting bottlenecks in place and that’s what’s happening with non-performing loans at this time.”

Mr Bowe said the IMF’s “stress tests”, which measured Bahamian banks’ resilience to external economic shocks generated by global recessions and natural disasters, had shown the value of further slashing non-performing loans now before such events occurred.

“It is a dark cloud that we don’t want to have with any rainy days that may come,” he warned. “We want to clear that dark cloud now.”

The Central Bank, though, in its monthly economic report for May 2019 hailed the fact that non-performing credit in the Bahamian banking sector now stands at “the lowest rate recorded since 2008” - $502.1m or 8.9 percent of total outstanding loans.

However, the IMF’s financial sector assessment report said that despite the ‘bad loans’ fall “weaknesses persist” - especially in banks’ mortgage portfolios, which account for 60 cents out of every $1 that is non-performing. It added that many restructured loans were at “increased risk” of becoming non-performing once again.

“Despite reductions in non-performing loans, weaknesses persist in residential mortgage portfolios,” the IMF said. “Two of the seven domestic banks (about 15 percent of the seven domestic banks’ assets) and the two largest credit unions have non-performing loan ratios significantly above 10 percent, making them vulnerable to further write-offs.

“Non-performing loans remain high at 9 percent, after peaking at 17.2 percent in 2014, with three institutions representing 61 percent of aggregate non-performing loans. Non-performing loans are made up of residential mortgages at B$323.6m (or 61.7 percent), consumer loans at B$143.7m (or 27.4 percent) and commercial loans at B$57.1m (or 10.9 percent).

“Non-performing loans have historically spiked during slowdowns and persisted for extended periods. The ratio remains high at 9 percent, after peaking at 15.3 percent in 2013. The situation varies significantly across banks, with three institutions owning 61 percent of all NPLs. The large stock of restructured loans is at increased risk of falling back into non-performing status.”

The IMF also added that “the real estate market in The Bahamas has been relatively soft for the past several years, as evidenced by the significant stock of distressed properties listed for sale”.

The Christie administration’s rationale for developing the Homeowners Protection Act was to 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, banking industry executives repeatedly warned before its passage that it threatened to increase the costs, time and difficulty/uncertainty incurred by banks in repossessing mortgage collateral - usually the homes and businesses subject to the original loan.

With a higher risk associated with mortgage lending as a result, it was feared that the banks may both hike interest rates and refuse to grant new Bahamian loan applicants access to credit.

Mr Bowe, though, said the Act was presently “in abeyance” or “suspension” while the Ministry of Finance and government review it. The Act would insert 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’, it 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”.

Comments

Clamshell 2 months, 2 weeks ago

$500,000,000 in bad mortgage loans to be simply written off in a nation of just 400,000 people. Shocking. Just ... shocking. What is it about Bahamians, this idea that a loan or other debt can be just forgotten the day after you’ve spent the money?

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B_I_D___ 2 months, 2 weeks ago

A healthy chunk of that 500M will be connected politicians and their cronies.

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TheMadHatter 2 months, 2 weeks ago

No my friend. Bahamians in many cases are victims of what the industry terms "predatory lending". If govt would put in place a credit rating system and also a law to allow bankruptcy just like chapter 11 & 7 in usa where a person can sell all their assets and money pays creditors and what is left is wiped off the books every 7 years THEN you would see all of this foolishness disappear quick. Banks would stop abusing the poor overnight and these fake numbers quoted here would return to the zero value they should be. Its not about paying just debts. These debts are not just...they are not true...and if you look at the total intetest and fees you will find they exceed the lawful 20% max also....even at a time when mortgages in usa are 3%. These banks have free tickets waiting for them at Hell's entrance gate.

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Clamshell 2 months, 2 weeks ago

I agree with your comments on a bankruptcy process, and I believe that unlawful interest charges should be prosecuted.

However, this problem of not meeting obligations shows up in many transactions that have nothing to do with bank loans. It is not uncommon to see a woman with a fresh $300 hairdo crying that she can’t pay her electric bill. Or a student wearing all the latest hip-hop gear, and $200 Nikes, cry that he/she cannot pay their tuition bill. This goes beyond mortgages, my friend ...

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Clamshell 2 months, 2 weeks ago

Story: I was sitting in magistrate’s court one morning, waiting for my gardener’s case to come up, and a bank was trying to collect on a series of unpaid credit card bills. One after the other.

One fellow had gotten a credit card, very quickly maxed out its $6,000 limit and wasn’t making any payments. Although he had a house and a job, and a car, he complained of being a poor man and how a $6,000 debt was beyond his ability to pay.

As a compromise, the magistrate approved a plan for him to repay the credit card bill at $5 a month. Even without interest, at that rate it would take him 100 years to pay that off. But everybody seemed to think this was just a perfect solution. SMH.

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bogart 2 months, 1 week ago

Clam, you should also add the fees the lawyer has to be paid by the bank and the costs, man hours by bank officer, paperwork countless caĺls.......

Jus not precise in looking at the situation......FIRST to begin the bank officer needs to do an interview entailing... positive positive positive...checks... mathematically analyze ....confirm...stress test..evidence..proofs...etc..the ability to repay the card debts an survive....(CUSTOMER CAN SUCCESSFULLY QUALIFY FOR LOAN....BUT POINTLESS IF THEY CANNOT SURVIVE ON BALANCE INCOME..).......and backed up by verified documentation. ........Clam can I be your gardener because you must be paying very very good salary....as the monthly servicing of the debt involves calculating a percentage of monthly income including other loan payments to be successfully repaying loans......AND..making bank profits for bank shareholders. SOME background is that lending employees follow advices from HEADQUARTERS..overseas...in having goals of issuing ...amounts of Credit Cards...Mortgage loans...Consumer loans, various like Cars, Vacation usually according to period in year etc.....LOCALLY ...these loan goals are broken down to each BRANCH according to locations.and targets of amounts, values of loans parcelled out to individual loan officers. Some of targets may be by a team also. Bank Officers have target quotas mabye 5 - 6 million dollars in Mortgages, Credit Cards, Consumer loans Referrals to other Branches etc. IT IS ESSENTIAL for loan officers to make targets as to get favourable salary increases and rewards bonuses. Banks are businesses to make profits...!!!!!!!.... AND THERE MUST BE... FAIR PLAY... NO NEGLIGENCE...DUE CARE TO ..LOAN APPLICANTS....GENERALLY ...POSITIVELY....ABSOLUTELY...BY THE SUPPOSEDLY BETTER LOAN OFFICER sitting across the desk in a tiny cubicle all by demselves.....not seeing what is imputted on computer...or not even given copy analysis .. Above may or may not be correct in any form or manner. BUT can you hire me as a gardiner cause generally from the Card limit you likely supposed like paying a gardiner like $40,000 plus a year....was it a Gold Card..?

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Clamshell 2 months, 1 week ago

Mr. Bogart, try reading before you start shouting. I described some other guy’s credit card case ... my gardener was not there for failing to pay his bills. He had a separate issue, involving his driver’s license. He’s way smarter than you, so I don’t think I’d hire you in his place. He can even spell “gardener” correctly.

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bogart 2 months, 1 week ago

Clamshell "Story: I was sitting in a magistrate court one morning, waiting for my gardener case to show up, and a bank was trying to collect on a series of unpaid credit card bills. One after another."

And now you now bring up ...that you there "...my gardener was not there for failing to pay his bills. He had a separate issue involving his driver's license." Well mudda sic, talking different "Story". Greatest sympathy to your gardener having to work for you. Many rich people jus like saying different things more of eloquence with contradictory stories. Let's face it good grammar, punctuations, proper speech, stifling freedoms of speech etc dont always what you write make you right. Look at what all the educated people put all of us pore people in.

And yes, I did have to step down to your level that you bin there in court to deal with your gardener credit card...and now you writing about there on a gardener driver's license. Muddoes..

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Clamshell 2 months, 1 week ago

I wrote, “One fellow had gotten a credit card ...” Clearly referring to some other guy, not my gardener. You still cannot read. That’s not my fault.

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bogart 2 months, 1 week ago

Exactlly as you chose to be hiding behind a name.....why isn't you chosen that nowhere else your story your gardener not be the "One fellow" ...Never before until now you did not say the fellow is not your gardener but you were in a court dealing with a "series of unpaid credit catd bills. One after another." And then you further introduced in second story your gardener with driver's license matter. And the "fellow" you describe yourself has a car, hence driver's license and a "job" the fellow you comment on. having these. Until now and continuously you will be continuously illogical and disingenious with supposedly elegant commentary. Many rich, cohorts, cronies no different with using eloquent languages to propogate and protect dere status quo, ...many oppress, regressive taxation, low wages, illegals employed, lack of full public Health facilities needing repairs, ridicule, persecute pore Bahamians look at the country. Try an be a better than the status quo political hacks and you can do it.

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bogart 2 months, 2 weeks ago

All these delinquent homeowner loans needs to be investigated from the FRONTend ALSO and not at the BACK end..delinquent result...!!!!!.......the LOAN CONTRACT IS BETWEEN BANK AND ITS OFFICERS AND THE CUSTOMER......Time to investigate the aggressive lending practices and jailing bankers who are guilty in not following lending rules....possibly falsifying figures, bribery, erring to meet the bank loan targets to get salary increase, faulty inadequate mathematical analysis..., following headoffice in other countries to meet quotas, using archaic obselete bias application forms, negligence, lack of due care and attention to applicants, insufficient uneducated lending skills of loan officier, inadequate interview meeting with applicants, BANK OFFICERS...intervening family, politicians, friendsetc..., bank still following Bank lending ratio of 45% Loan Debt Service Ratio of income all loans being less to lend up to 95% - 90% of purchase price or Appraised value and remaining income can allow customer to pay bills an survive.......and still dis ratio is STILL USED FROM OVER QUART.ER CENTURY.....fully knowing that prices, interest tates, expenses have changed.!!!....very easy majority of loans can be looked into for BANK NEGLIGENCE.......da customer hand never clap all by itself....!!!!!....if any bank can say they never past years changed any lending procedures practices....then they complicit knowing their practices was flawed leading to disaster....

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Chucky 2 months, 2 weeks ago

Predatory lend practices????

More like uneducated idiot borrowers!

When the last time you saw a banker jump out of the bush and put a gun to your head and make you borrow money.

Just because some fool coined the phrase “predatory lending” does not mean it’s a think, or even real.

Why do people believe this garbage and make comments as though they know what they’re talking about.

Bahamians are some of the most foolish people in the world for carrying on like they do.

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TheMadHatter 2 months, 1 week ago

You can ignore reality if you wish, and suffer the consequences of living among a decimated population. People who cant come into your store or place of business and spend money. I know a guy who applied for a car loan and got it. During the interview was offered an additional 2 thousand in cash "if he needed it or could use it". Quote. Who couldn't "use" 2 thousand dollars? With your argument we should not be upset with drug dealers/pushers because kids should "just say no". Why do you think they are called "pushers"? Why do you think they need to push, and why do they push? Same reason these "lenders" push loans with quotas. The quota is the push. Do you really think the quota over the head of the lending officer has no effect on his decisions? Thank God the Courts understand these things.

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