Saturday, September 15, 2012

Bankers have expressed fears that the re-named Homeowners Protection Bill would result in The Bahamas’ own ‘credit crunch’ ...if passed into law as is...

Homeowners Bill Still ‘Shoots Risk Through The Roof’

Tribune Business Editor
Bankers yesterday expressed fears that the re-named Homeowners Protection Bill would result in the Bahamas’ own ‘credit crunch’ if passed into law as is, with Tribune Business told there were no “material changes” from the first draft.
While no commercial bankers were prepared to speak openly yesterday, under condition of anonymity senior executives said the proposed legislation “fundamentally changes” the risk/reward calculation associated with lending.
This, Tribune Business was told, was largely due to the Bill giving the Supreme Court the power to intervene when commercial banks were attempting to realise exercise their power of sale on delinquent properties.
Further exercising commercial bank concerns is that the Bill plans to give the courts the ability to delay this process for an unspecified time period, creating huge uncertainty about the industry’s ability to realise mortgage security/collateral.
As a result, senior bankers explained, the risk associated with mortgage lending in the Bahamas would dramatically increase, with potentially huge implications for the wider economy - especially the real estate and construction industry.
Tribune Business understands that a meeting to discuss the proposed legislation, involving government representatives, the Central Bank of the Bahamas, the Clearing Banks Association (CBA) and members’ attorneys, and other lenders has been scheduled for today.
However, a copy of the Homeowners Protection Bill, which has been obtained by Tribune Business, is little changed from the first version - also seen by this newspaper.
That document was panned by many, including former minister of state for finance and Central Bank governor, James Smith, who is now a key Ministry of Finance adviser. The banking industry, which had expected the legislation to be radically revised, is also likely to have been disappointed.
“I don’t think there’s a material change in it,” one banker told Tribune Business. “What they are doing is allowing the courts to intervene in a transaction where the lender has assessed the risk and levied an appropriate rate of return.
“When there’s a borrower default, that’s already been priced into the rate, and you have some expectation as to what happens when there’s a default.
“But the Bill will allow the courts to determine what happens, which means the underlying risk fundamentally changes. Why would any lender enter into an open-ended contractual arrangement where the court can intervene and fundamentally change the risk in the middle of the contract?
“All these open-ended arrangements shoot the risk through the roof.”
The banking/lending industry’s concerns are focused on sections four-seven of the proposed Bill. Clause four allows the court to give a borrower relief “from consequences of the breach of a covenant or the non-payment of the principal or interest of the loan”, while number five gives borrowers time to “remedy” their delinquency when the lender is seeking to take possession of the property.
In particular, clause five allows the courts to prevent a lender taking possession of a delinquent property “for such period or periods as the court thinks reasonable”.
They can do this if they believe the borrower can pay sums due, or remedy, their default “within a reasonable period”. Both terms are short on specific, leaving everything to the court’s and judge’s discretion, and creating a nightmare of uncertainty for the banks.
Suggesting that the Bill’s drafters were likely unaware of the potential ‘unintended consequences’, one banker said: “What this is going to do is simply increase the risk of the lender.
“You are stuck with risk that you cannot manage, because in the event of default the courts can intervene, and you can’t charge a rate commensurate with the underlying risk.
“It’s all about risk and return. If you’re risk can’t be controlled and defined fully upfront, with all this uncertainty you will act appropriately.”
Essentially, with the risks associated with mortgage lending increased, and returns reduced, Bahamian bankers said there would be major ramifications for home lending in this nation.
Potential consequences, they added, included fewer persons qualifying for mortgage loans; higher downpayments and interest rates; and potential withdrawal from the mortgage market.
All were conditions for a ‘credit crunch, and the bankers said this would impact home ownership, the real estate market and overall prices, and the construction industry.
“Anything that increases a lender’s risk is going to be reflected in some other action, whether it’s an increased interest rate, smaller advances or withdrawal from the lending market,” one banker warned.
“Any combination of those things could apply, and it will not be good for the economy.”
The same banker also questioned whether the overstretched court system would be able to cope with potentially 4,000 delinquent mortgage borrowers.
Another banker added of the Bill: “There’s still a lot of gaps in it. It would not have the desired impact.” They suggested it would impact interest income, and solvency and capital ratios, creating problems in complying with international accounting standards.
Meanwhile, section six of the Bill proposes to allow courts to consider advance payments made by delinquent borrowers, while section seven permits them to give borrowers a period “of no less than 12 months” to make good their arrears under certain circumstances.
Other clauses exempt banks/lenders from paying Stamp Duty if they sell a foreclosed property within five years of granting the loan; give borrowers the right to choose their attorneys, appraisers and property insurers; allow borrowers to remortgage with another institution at no cost; and aim to prevent “excessive salary deductions”.
September 14, 2012