Wednesday, May 23, 2012

The proposed government mortgage relief program is now a very important national issue ...and it is imperative that we devise a national solution which is reasoned and considered... ...As corporate citizens, we at Circle Vision Financial Planning (CFAL) are simply interested in good economic policies ...which will further enhance the well-being of all citizens and permanent residents of The Bahamas

Economic View CFAL’s recommendations to the government on the mortgage relief program

CFAL Economic View

We have read with interest varying responses to leading international credit agency Moody’s warning to The Bahamas government on its proposed mortgage relief program.

Readers would recall in this column on April 3, 2012, we at CFAL expressed our concern with the then Progressive Liberal Party (PLP) proposal, as we had difficulty understanding the feasibility of the plan.  While we agreed with several of the recommendations, we also strongly disagreed with others.  This is what makes a market.  It is now the government’s program.

We wrote that “the center of the 2008 global crisis was the mortgage debacle, where the U.S. government through its government funded mortgage agencies provided funding for residential mortgages that in most cases the citizenry was not able to afford.  The end results, foreclosures and a depressed housing market, now headed into its fifth year.  As we all know, in the absence of a holistic economic plan, we continue to be dependent on the success or lack thereof of the U.S. economy.  The Bahamas is now experiencing what the U.S. experienced back in 2008 in the mortgage market as a result of lenient lending practices.  To fix the core of this problem, we need policies that are realistic, achievable, and measurable.”

We went on to say that: “While the idea of providing relief for persons having a difficult time in meeting their mortgage obligations is arguably a good one and one which we support, we have serious questions on some of the specifics outlined in the proposal as reported in The Guardian”.

We also noted that: “In a democracy it is not prudent for the government to mandate any financial institution to do anything; it is the shareholders, directors and management which decides on what course of action should be taken.  Governments and financial services regulators (Central Banks) sometimes resort to ‘moral suasion’ in a credit crisis in order to try and persuade financial institutions to provide relief to mortgage payers.  Alternatively, monetary policy initiatives by the Central Bank in the form of interest rate reductions are applied to solve the issue of mortgage delinquency.  That course of action, particularly with respect to our current predicament, is likely to be ineffective at best.  To date, we do not see the expected positive results.  We can point, however, to the long-term consequences.  It is our view that a holistic plan is needed.  A plan that examines the impact on all stakeholders to avoid unintended consequences.”

The burden

Since Moody’s comments, we read and heard on talk shows where many are recommending that the government simply cut interest rates.  They further state that all should bear the burden.  Well, why should all bear the cost?  “All” did not participate while many were not being prudent.

None of the economic and financial pundits speak to the cost and consequence of the reduction in interest rates.  Perhaps they do not know or choose to be intellectually dishonest in recognizing that it represents a transfer from savers to borrowers.

The recent cut in interest rates had serious consequences for many, including pensioners, National Insurance, insurance companies, the various government and private sector defined benefit pension plan schemes, savers and the Bahamian dollar.  In the United States and Europe, such a policy of artificially low interest rates is increasingly being referred to as “financial repression”.

These pundits continue to refer to the government savings on interest payments of about $25 million per year, but ignore the long-term increase to government debt and the cost associated with it.  We estimate a long-term increase in debt obligations of over $500 million.  The cost of government funding this deficit will outweigh the immediate savings.

As we have written numerous times in this column, “What the Bahamian people need are jobs”.  It’s the only way for us to manage the current and anticipated debt levels save for a significant increase in taxes which the government has indicated it does not intend to do in the short-term.

We believe the government will have to take a hard look at our taxation system as we have indicated on many occasions.  Merely dropping interest rates or guaranteeing interest payments will not cause lenders to extend credit especially since the creditworthiness of many borrowers was and still is slipping.  In the case of new or revised loans at the lower rate, the average monthly benefit will not make much of a difference to the borrower, particularly since it is the principal balance that is often too much for the borrower to bear.

In implementing a relief plan which we support, we urge our government to be mindful of the unintended consequences which can change mortgage funding in the future.  Will financial institutions continue to offer 30-year mortgages or refinancing programs if, for whatever reason, they cannot access collaterals after 15 or 20 years?  It’s not an easy decision.  We must tread carefully.


We recommend the new government consider establishing a Long-Term Mortgage Relief Program (LTMRP), whereby a special purpose vehicle (SPV) is created for the expressed purpose of acquiring the distressed mortgages from financial institutions and issuing long-term bonds to fund the acquisition of the same.  A similar structure was used in the United States in the early 1990s to resolve the distressed mortgage and property assets of their Savings & Loan crisis.

We would recommend the government consider the following:

• Articulate clear guidelines on who would qualify for the mortgage relief program

• Relief on residential mortgages only up to a maximum of $500,000

• Purchase loans at a discount (i.e., 20-30 percent) from financial institutions with specific caveats

• Mortgage tenure up to 40 years

• Interest rates on restructured mortgages up to 5.50 percent (as indicated in plan)

• Cap interest spread on bonds issued to purchase the mortgages

• Annual audit by an independent accounting firm.

This would accomplish several things:

• Provide transparency to all

• The government doesn’t interfere in private contracts

• The government can restructure the loans with tenure up to 40-50 years with specific caveats.

The government should then issue fixed rate long-term bonds to fund the SPV.  This will lock in funding costs.  Natural buyers of these bonds will be pensioners, NIB, insurance companies and pension plans.

The government commitment will be defined with supporting assets (the mortgages) with monthly cash-flow which should be net positive for Moody’s and other rating agencies.  An example, if the government issued $75 million in bonds to purchase mortgages at a discount of 20 percent, the proposed interest of 5.50 percent would give the government some .50 basis points to service the mortgages, while having assets worth some $93.75 million.  The net cash cost to government would be a maximum of under $500,000 and the guarantee to support the loans.

Banks and other institutions would have stronger balance sheets, which would encourage them to increase lending to companies to create more jobs and opportunities.

This will reduce any semblance of moral hazard such as dictating the number of payments after which a lending institution will be unable to exercise its foreclosure provisions against a borrower.  What we don’t want is where financial institutions refrain from refinancing activities for fear of potential loss.

The program can be administered by the Bank of The Bahamas for a negotiated maximum cost, a 51 percent government entity to ensure its efficacy.

Reasoned response needed

We would strongly discourage the government from getting in the business of paying its citizens’ mortgage interest payments for any number of reasons, inclusive of moral hazard, perception of special favors to the disadvantage of others, increased debt and the potential to devalue our dollar, all of which can seriously cripple our economy.

We reiterate our comments that given the current economic climate as well as the projected growth trajectory, it is highly unlikely that The Bahamas could afford this expenditure except if we are able to grow the economy (provide more jobs) on the order of 10 percent per annum.

The proposed government mortgage relief program is now a very important national issue and it is imperative that we devise a national solution which is reasoned and considered.  As corporate citizens, we at CFAL are simply interested in good economic policies which will further enhance the well-being of all citizens and permanent residents of The Bahamas.

What we do not wish to see is capital being inadvertently driven away because of some ill-advised economic policy.  Whatever we think of the rating agencies, including Moody’s, their comments can cause our cost of capital to increase substantially in the future.

We should not dismiss their claims, but embrace them and articulate in a coherent manner the details of the proposed solution and chart a course in the best interest of The Bahamas, realizing that The Bahamas lives in a global environment.

• CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella.  CFAL provides investment management, research, brokerage and pension services.  For comments, please contact CFAL at:

May 23, 2012