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| The great mortgage crisis |
Juan McCartney
Guardian Senior Reporter juan@nasguard.com
Published: Aug 20, 2012
Though the country’s current mortgage crisis has become a political football since the Progressive Liberal Party (PLP) introduced a 10-point mortgage relief plan in April, what is happening in the housing and banking sectors as a result of overdue mortgages threatens to derail the dreams of generations of current and hopeful homeowners. Now, with a simpler, scaled-down version of the mortgage relief plan set to come on stream during the first week of September, the Christie administration is hoping to help at least 1,100 homeowners whose mortgages are in peril. And though the PLP and Minister of State for Finance Michael Halkitis, one of the main engineers of the plan, are well-intentioned, the plan soon to be put in place is woefully inadequate in terms of addressing the sheer number of delinquent and non-performing mortgages held by Bahamians. Interestingly, the plan released in April was criticized, most notably by international credit ratings agency Moody’s, as too all-encompassing and a threat to the stability of the public purse. In short, The Bahamas, like many jurisdictions, is in a financially strained situation of its own, and is hardly in a position to solve the mortgage crisis by adding to the massive national debt left in place by the Ingraham administration. The old plan promised too much and put onerous conditions on financial institutions which are still struggling to shake off the hammering they took during the recent global economic downturn. And while 1,100 people finding relief through a government plan capped at $10 million is good news, the situation will remain in crisis for the foreseeable future. Add to that the draconian foreclosure restrictions the government proposes to place on financial institutions that are outlined in the draft form of the Borrowers’ Protection Bill, and the government could unintentionally cripple the mortgage sector and marginalize thousands of Bahamians, turning them into perpetual renters with no chance of ever owning a piece of the archipelago.
How bad is the mortgage crisis? According to The Central Bank of The Bahamas’ latest figures, and information gleaned from the country’s top financial institutions, nearly 3,000 mortgages, accounting for nearly $500 million, are considered non-performing (more than 90 days past due). This means that one in five home loans is in real danger of foreclosure. With so many mortgages in peril, and the number growing every day, many financial institutions have taken the position of being more selective in approving mortgages. Banks, because of increased liquidity due to less lending, are also reducing the rate of interest given on deposits, further deteriorating returns on investments for savings conscious Bahamians. Less lending means fewer new homes are being constructed. The Central Bank has estimated that new home construction starts have decreased more than 28 percent over the period of January to June 2012, compared to the same period last year. Fewer construction starts means fewer jobs for skilled and unskilled laborers in a time of near record unemployment. The reduction of much-needed cash those workers would normally inject into the economy has a negative ripple effect on many retail vendors, who would benefit from the weekly infusion of cash those workers would usually provide. No doubt, many will welcome the relief the PLP is promising, even if most delinquent borrowers will not qualify for the aid. After the Ingraham administration failed to take concrete action to provide the kind of help the PLP is offering, despite a promise to do so in 2008, the Christie administration deserves a mammoth amount of credit. But it must temper its zeal to deliver on election campaign promises and take a deep breath before it moves forward beyond the plan recently announced in Parliament.
The Borrowers’ Protection Bill It is unclear exactly who authored the draft of the Borrowers’ Protection Bill that was made public last week; however, Halkitis, once again displaying that he’s one of the smartest men in Parliament, was quick to point out that that draft will likely not be the one ultimately tabled in the House of Assembly. If financial institutions are reluctant to lend money now, the party would likely shut down almost entirely if the current form of the Borrowers’ Bill is ever enacted into law. The bill, while seemingly well-intentioned, makes it a nightmare for financial institutions to foreclose on any owner-occupied property. Foremost, the legislation allows the Supreme Court to rule on any loans in arrears. The Borrowers' Bill further specifies that lenders cannot move to foreclose on a borrower unless paperwork is served at least 30 days in advance. A borrower may also, twice a year, request particulars on the mortgage at no cost. If the lender fails to respond within 30 days, or the answer is deemed "incomplete", "any rights that he may have for the enforcement of the debt or mortgage, or for the cancellation or specific performance of its terms, shall be suspended until he has complied with the notice". Under the proposal, borrowers can also pursue a sale of the mortgaged property where the mortgagee seeks foreclosure. The legislation also automatically postpones foreclosure proceedings for at least one year if the Supreme Court deems the property is a primary dwelling. It also allows the Supreme Court to grant additional time to the mortgagor to get his or her financial house in order when possession is being sought. That clause is not a bad idea, but a little too vague for practical purposes. Another clause in the legislation permits the borrower "to make arrangements for payment of arrears before excising the power of sale". That also seems to be a positive thing, but again, a little too broad for practical purposes. The legislation also allows for a delinquent borrower to stave off foreclosure by paying all arrears owed before the proceedings are complete. An interesting notion, but why would a bank continue foreclosure proceedings against a borrower who had come into such a sudden windfall? Another clause allows people who have paid at least half of the principal on their homes to retain ownership of their homes as long as they can keep up with the payments from a point determined by the court. The legislation also places many more restrictions on financial institutions that could greatly damage their bottom lines. Nobody is suggesting that people who cannot afford to pay their mortgages should be unceremoniously chucked out onto the street, but there is a natural order to things, which often involves disappointment. It shouldn’t be the role of government to prevent financial institutions from taking control of property that legally belongs to them. Also, the government must consider that many of these borrowers simply got in over their heads and need to go through the foreclosure process in order to purchase homes in line with the realities of their new budgets. The head of one of the country’s largest lenders, who did not wish to be named, told The Nassau Guardian that if the current version of the bill is enacted, that institution could require down payments on new mortgages as high as 30 percent, with a possible collateral guarantee for those pulling in less than mid to high six-figure salaries every year. Simply put, only millionaires, including doctors, lawyers, and accountants will likely be given home loans, according to the lender. Those loans would likely be to build rental properties. Those making more modest salaries would be relegated to occupying for the mid- to long-term, the lender noted. The quick read implies that in the government’s effort to protect homeowners who are now in trouble, it might create future generations of renters as opposed to homeowners, as has been the trend since independence.
What can be done? The restructured mortgage relief plan and the commitment to redraft the Borrowers’ Bill are a good start, but more is needed. There will always be winners and losers in the mortgage sector. However, The Bahamas is a small country and with most of the population situated on New Providence, it doesn’t make sense to create a class of bad borrowers with nowhere stable to live. The United States, whose major financial institutions can be directly attributed with causing the global economic meltdown, has come up with numerous creative solutions. One plan offered thousands of delinquent borrowers the option to turn their mortgages into leases. No longer burdened with making good on the past due interest and principal payments, families have been allowed to remain in their homes, paying a monthly amount more in line with their revised fiscal situations. The banks should seriously consider the merits of such a plan. Some states in the U.S. are also looking into the possibility of using eminent domain to seize properties without paying banks past due fees and payments, and working out more favorable terms with those facing foreclosure; though many have dismissed this as a reckless idea. Of course, there is always the old-fashioned idea that banks have been espousing for years – go talk to them. Most banks want to work out payment plans with borrowers who are having trouble. They don’t want bad debt on their books and they don’t want to have to try and sell homes in a buyer’s market. The government certainly has a role to play in helping homeowners in trouble, but aside from the plan it has already proposed, it should help more in terms of tax concessions, easing interest rates and implementing sensible regulations. One also has to keep in mind that the government should probably get the Bahamas Mortgage Corporation’s extremely disheveled financial house in order before it seeks to dive too deeply into private sector mortgage matters. |
