The Tribune

By NEIL HARTNELL

Tribune Business Editor

A LEADING housing developer yesterday urged Bahamians and the banking industry not to "throw under the bus" the Progressive Liberal Party's (PLP) plan to tackle mortgage foreclosures, arguing that the so-called funding gap would not be as great as the $105 million identified by Tribune Business.

Franklyn Wilson, chairman of Arawak Homes, while acknowledging there would be a 'gap' between the plan's proposed government guarantee and funds raised from a levy on home buyers still in good standing on their mortgages, argued that "the wider national interest" outweighed any extra burden this may impose on the Public Treasury.

Pointing out that the PLP's plan was designed to "work with" Bahamian commercial banks, not impose anything on them, Mr Wilson said no Minister of Finance would agree to guarantee to a bank a loan bearing an 8 per cent interest rate - the average interest coupon attached to a mortgage loan today.

Any guarantee would be for an interest rate substantially less than that, the Arawak Homes chairman argued, something that would be warranted as the Government backing had reduced the risk associated with delinquent mortgages. This, Mr Wilson said, meant the $105 million 'gap' feared by bankers would be substantially less.

And, refuting claims the sector was not consulted prior to the PLP unveiling its plans, Mr Wilson said "some of the most senior bankers in the country" gave their input on a telephone conference call he participated in.

They explained, he added, why the Bahamas should not follow the Cayman Islands' lead when it came to tackling the mortgage delinquency/foreclosure crisis. He declined, though, to name the bankers involved.

"The Cayman Islands had a plan that, in effect, was giving people a $20,000 subsidy. Bankers outlined to the PLP why the Bahamas should not go that road. The Cayman approach was looked at and had serious shortcomings," the Arawak Homes chief said.

Calling on the banking industry, and Bahamians in general, to set aside partisan politics and view the PLP proposal objectively, Mr Wilson told Tribune Business: "The first thing is to recognise we have a crisis.

"In recognising that crisis, it has several dimensions. Firstly, at the human level it is destabilising families. Second, in terms of the economic impact, it's a huge drag on home construction. That, in turn is a major handicap for the furniture people, the fencing people. Construction affects pretty much every sector of the economy.

"The magnitude of this problem is such that international rating agencies and the IMF, I am told, are likely to identify it as an issue that needs to be addressed otherwise it could drag down the credit standing of the country."

The Clearing Banks Association (CBA), the organisation representing the Bahamas' commercial banking industry, told Tribune Business earlier this year that between 1,500-2,000 Bahamian homes were subject to mortgage loans more than 90 days past due. The cumulative worth of these non-performing mortgages was said to be around $450-$460 million.

As a result, Mr Wilson added: "The idea of a bold and aggressive plan to address this situation is very much in the national interest. In fact, it is potentially an economic stimulus, because it is a necessary step to getting the economy moving. There are aspects to this plan which I encourage all not to throw under the bus."

Bahamian bankers yesterday expressed concern about the PLP proposal that they should write-off 100 per cent of the unpaid interest and fees accumulated by delinquent homeowners, warning that capital levels and profitability would be impacted.

Banking industry sources also questioned why Bahamas-based mortgage borrowers in good-standing should be "penalised", through the imposition of what is effectively another tax, to pay for those who had defaulted on their loans - especially those in a position to pay, but not doing so.

Other concerns raised were how the 0.5 per cent levy would be collected, who would be responsible for doing so, and who would administer the proceeds. Bankers also feared the PLP proposal would create "moral hazard", as a government guarantee would remove the incentive, at least in the eyes of some mortgage holders, to remain current with their loans safe in the knowledge there was a 'backstop' to fall back on.

Mr Wilson did not address any of these concerns yesterday, focusing on aspects such as the proposal to give struggling Bahamian homeowners access to their pension fund savings "at this time of crisis to save their homes".

"There is much in this that says to the banking community this is great to have, and is responsible," he added. "None of these things burden the Public Treasury.

"Fundamental to this plan is to work with the banking community to address the guarantee and the write-offs...... It's a matter of negotiation. What bank is going to say: 'If I get a government guarantee to improve my position, what am I not going to give up for that?'"

The Arawak Homes chairman questioned how any Bahamas-based banker could refuse the offer of a government guarantee to make a bad loan good. Those who objected, he said, "need to look at who's paying them and decide where their professional responsibilities lie".

Based on feedback from the Bahamian banking community, Tribune Business calculated yesterday that the PLP's plan - as presented - could saddle the Bahamian taxpayer with a further $100 million burden by guaranteeing the interest payments of delinquent borrowers for a five-year period - from 2012 to 2017.

Based on the fact that some $450 million worth of Bahamian mortgage loans were non-performing or more than 90 days past due, and taking an average 8 per cent interest rate on these loans, commercial banking sources said that under the PLP's scheme, the total annual payment being guaranteed by the Government would be around $36 million.

Over a five-year period, this would amount to $180 million. To help cover this cost, the PLP is proposing that mortgage borrowers who are in good-standing pay 0.5 per cent of their outstanding loan balances into a fund that "would be used to help meet the obligations of those borrowers who cannot pay their interest through 2017.

However, banking industry sources said that taking the roughly $3 billion worth of outstanding industry mortgage loans as a 'rule of thumb', the 0.5 per cent levy would raise around $15 million per year collectively.

Over five years, it would raise around $75 million - a figure some $105 million short of the $180 million in defaulted mortgage interest that the Government would guarantee on the banks' behalf. That $105 million would have to be covered by the Bahamian taxpayer, and at a time when the Government's fiscal position is already under severe strain.

Mr Wilson, though, disputed the 8 per cent interest rate used in the bankers' and Tribune Business's calculations. Due to the existence of a government guarantee on the defaulted interest, he argued that the rate would have to be reduced, as associated risk had come down.

"What government will give a bank a guarantee for a loan of 8 per cent? It can't be a number of 8 per cent. The rates would have to reflect the fact risk has been materially reduced. There is no way any Minister of Finance would give any bank a guarantee on a loan that is Prime plus 3.25 per cent," Mr Wilson told Tribune Business.

"There has to be a relationship between risk and reward. If you're reducing the level of risk by getting a government guarantee, you can't expect the same high interest rate."

As a result, he argued that the 8 per cent interest rate used in the banker's calculations would be substantially lower, along with the estimated gap between the guarantee and fund's value.

"We're talking about a lower figure, less than $100 million," Mr Wilson told Tribune Business. "The Minister of Finance has a lot to consider. The implications of getting rid of the pain and suffering, the implications of encouraging further growth and stimulus, 25 per cent of which will end up with the Public Treasury, and the implications of the credit standing of the country.

"Whatever the gap is, the Minister of Finance will have to weigh that against the wider national interest."