By NEIL HARTNELL
Tribune Business Editor
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”.