The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A realtor yesterday hailed the Central Bank's bid to help more persons "accomplish the Bahamian dream" although he warned the impact may not be felt instantly.

Matt Sweeting, chief executive at 1oak Bahamas, told Tribune Business that the effects of the banking regulator's abolition of the mortgage indemnity insurance requirement may not produce any results until the 2024 second quarter at earliest as both banks and borrowers will require time to adjust.

"I think this is a great sign for 2024. It's a good start to the year for a number of homeowners," he said. "I think what's notable about what I read, and the implications, is this really - while they have made this adjustment - it does not directly correlate or relate to the banks' application.

"The bank can still require the same percentage as it did before the Central Bank's adjustment. That's what leads me to conclude we won't see any results of this until maybe the second quarter. The banks have to digest this as well. My conversation with a leading clearing bank manager suggests they are just seeing this as well. They are now figuring out how they are going to move forward and apply it."

Without mortgage indemnity insurance, residential home buyers had to come up with 15 percent or more of the total purchase price from their own pocket. The Central Bank's elimination of this stipulation those potentially paves the way for more Bahamians to enter the residential housing market, as the down payment requirements may be less and access to mortgages improved

The regulator also gave the Bahamian commercial banking industry the go-ahead to assess the risk posed by individual mortgage borrowers on a case-by-case basis, thus providing more flexibility on the down payment demanded from home buyers.

Mr Sweeting also suggested that the Central Bank easing may create a more competitive mortgage market, which would also work to the benefit of Bahamian home buyers. Noting that Bahamian-owned institutions have been offering down payments as low as 5 percent, he added that the change may force the Canadian institutions to relax their 15-20 percent demand.

"I think it speaks to the Government's interest in assisting people in getting real estate," Mr Sweeting said. "It speaks well to what the objective is. The result of this is it should mean more mortgage interest in The Bahamas. It's a good way to start the year.

"The market as it goes into 2024 is still a super seller's market where there is minimal inventory and a lot of buyers. Anything we can do to make it easier to buy a property is good. All the indications are that we will have a busy market like we have done post-COVID where people are clamouring for real estate opportunities to suit their needs, whether single or multi-family, to accomplish the Bahamian dream."

The Central Bank, in unveiling the mortgage easing, warned, though, that the 50 percent debt-to-income lending ceiling limit still applies for borrowers. "The Central Bank of The Bahamas is relaxing the guidelines for domestic banks and credit unions on the minimum equity injection requirement for residential mortgages," it said.

"While this is not anticipated to have a significant impact on personal lending, it should reduce the cost burden for suitably qualified borrowers and allow some additional individuals to qualify for credit. With immediate effect, the mortgage indemnity insurance is removed from the Central Bank’s stipulation for borrowers to qualify for a reduced equity or down payment amount on residential mortgages.

"In the absence of the insurance, the minimum down payment for such mortgages was 15 percent. Moreover, in line with the Central Bank’s relaxed rules for other personal lending, issued in August 2022, financial institutions may also vary or set lower down payment requirements for residential mortgages, in line with their internal frameworks for assessing and managing individual borrower risks.

"However, lending institutions are directed to observe that personal lending is still subject to the borrower’s total debt service ratio remaining within a prudent limit of 50 percent," the Central Bank added.

"The exceptions are debt restructurings and/or consolidations for borrowers who are already indebted beyond this threshold, and for whom outstanding obligations are not increased as a result of the restructuring and/ or consolidations.

"Lending institutions are also directed to exercise continued prudence around the amount of credit extended as a percentage of the appraised valuation of the real estate, or the resulting loan-to-value (LTV) ratio. The LTV ratio also determines the risk-weighted treatment for mortgages when estimating banks’ capital adequacy.

"In particular, in accordance with The Bahamas capital regulations 2022, residential real estate exposures are weighted at either 25 percent, 50 percent or 100 percent, respectively, according to whether the LTV is less than or equal to 60 percent, between 60 and 80 percent, or exceeds 80 percent."

The Central Bank adjustments also come after mortgage loan approvals have slumped to their lowest level in four-and-a-half years, with almost one in four applications rejected because borrowers have a 50 percent debt service ratio.

Its full Lending Conditions Survey for the 2023 first half revealed that less than one third - or fewer than one of every three - out of a total 1,104 applicants were approved for a mortgage loan during the six months to end-June.

And survey data showed that the 32.2 percent approval ratio is the lowest since the 2019 first half, which represented a period prior to both Hurricane Dorian and the COVID-19 pandemic. The 52.6 percent and 52.7 percent mortgage approvals ratio for the 2019 first and second half, respectively, represent the high points of the past four-and-a-half years.

The approval rate slumped in the 2021 calendar second half, dropping from 51.5 percent for the first six months to 39.4 percent and continuing a steady downward slide ever since. While the economic fall-out from COVID is likely to be held at least partially responsible, the Central Bank has since relaxed its lending guidelines by allowing its bank licensees to extend credit worth up to 50 percent of a borrower’s income.

Previous guidelines have set this limit at 40-45 percent, but the regulator’s lending survey reveals that the reason more than one-third - or one in every three - of mortgage loan applications was rejected during the 2023 first half was because potential borrowers were still breaching the more generous 50 percent debt service ratio.

Using the Central Bank’s statistics, just 356 of the total 1,104 mortgage applications submitted during the 2023 first half were approved by its commercial bank licensees. This means that two-thirds, or 748, were rejected. Of that 748, some 33.6 percent or 251 were declined because the applicants’ debt service ratios would breach the 50 percent benchmark.

This would mean more than half their income would be going to servicing debt, placing their finances under stress especially if something went wrong. That 251 is equivalent to 22.7 percent of all 1,104 mortgage applications, which means close to one in every four submissions was dismissed because the potential borrowers/homeowners are already too heavily indebted.