The Tribune

By NEIL HARTNELL Tribune Business Editor THE Bahamas Mortgage Corporation (BMC) has placed a $14.5 million bond vital to keep it operating, its chairman telling Tribune Business yesterday that "the public is going to have to pay" a multi-million dollar sum to recapitalise both it and the Government housing programme. Dr Duane Sands said the Bahamas needed to stop "kicking these things down the road" when it came to the financial woes being experienced by state-owned institutions such as the BMC, and called for "a sea change" in ensuring they were run without political interference. He disclosed that the Mortgage Insurance Fund, designed to protect the BMC from losses resulting from loan defaults, only contained some $14 million - "a drop in the bucket" when compared to its potential total exposure on a $175.79 million loan portfolio which, currently, has an estimated 39 per cent delinquency rate. Dr Sands, an FNM Senator and the party's candidate for Elizabeth in the upcoming general election, told Tribune Business that out of the latest $14.5 million bond issue, which was placed within the last six weeks, the National Insurance Board (NIB) again stepped up to the plate by taking the lion's share. It took up $11.5 million, or 79.3 per cent, of the bond issue, with Commonwealth Bank acquiring $2 million and Family Guardian the remaining $1 million. Dr Sands said that when it came to the proceeds, some $7 million had initially been earmarked for the Ministry of Housing, and an equivalent sum for the BMC's bond sinking fund, with the final $500,000 destined to finance the latter's operations. However, some $4.5 million has now been targeted for the BMC's bond sinking fund, and Dr Sands said of the $14.5 million issue: "This is one of those things that had to be done to make sure there's no interruption in operations. "The private sector have seen the changes, and took it up. I was very upfront. This is the state of the Mortgage Corporation, and we are turning things around. There's certainly no intention for it to fail. "In an environment where investment returns are pretty paltry, the question is: Was this bond issue a reasonable investment? I think that it is certainly a more prudent investment now than it was two or four years ago." Expressing confidence that the BMC would have no difficulty in redeeming the $11.1 million in bond principal due to mature between 2012-2014, some $5.1 million of which is due this year, due to there being between $68-$70 million in the bond sinking fund, Dr Sands said the real issues would come in the period 2023-2026. During those four years, some $105 million in BMC bond principal was due to mature, with $46.3 million due to be returned to investors - primarily NIB - in 2025 alone. Between 2021-2030, some $115 million in BMC principal will mature, and this is where the asset/liability mismatch, and a $92.7 million sinking fund deficit as at end-September 2011, is causing concern. At that point, the BMC's sinking fund investments in government-registered stock and cash stood at $64 million, and total bonds outstanding were $156.7 million - a figure likely to increase by $10 million, at least, as a result of the latest issue. "It's not as if we're going to default on those bonds," Dr Sands said of the 2012-2014 variety. "The problem is those due to expire between 2020-2030, so it's clear that the Government is going to have to make a decision, and that decision will be to recapitalise the Mortgage Corporation and to change some of its fiscal behaviour. "That's coming. What that decision is going to be, I can't preempt the Cabinet." The BMC chairman said Prime Minister Hubert Ingraham was "very aware" of the need to "fix" the Corporation, and as a result different options were being "chewed over". These included increasing annual contributions to the BMC's bond sinking fund, calling on the Government loan guarantee or a combination of these and other strategies, but Dr Sands said there was no escaping the fact that the Bahamian people, via their taxes, would ultimately have to pay. "We're looking at some options, but have found the public is going to have to pay," he added. "At the end of the day, central government funds have to come from the people, and money has to come from somewhere. Where is uncertain, and that decision is above my pay grade. "We're going to clean it up. The problem is the cure is the bitter medicine people are going to have to swallow." Dr Sands pointed out that the annual interest bill on the BMC's $160 million-plus bond portfolio was "no insignificant chunk of change", and whatever recapitalisation move the Government made was set to involve "a huge investment on its part". Revealing to Tribune Business that the Mortgage Insurance Fund contained just $14 million, and would be able to provide just $12-$13 million to such an effort at best, the BMC chairman said "the way the law is written" currently only allows the Corporation to call on this when it is unable to recover the full value of the loan following repossession and sale of a distressed property. This, inevitably, would require the eviction and foreclosure on at least several hundred Bahamian homeowners. As at end-December 2010, the BMC had 1,277 mortgages that were in arrears, some 1,019 of which were non-performing or over 90 days past due. "Can you imagine? It's a horrible catch-22, because this has made the problem worse if you do the right thing. It becomes a huge political nightmare. At what point in time do you do the right thing?" Dr Sands said of the Mortgage Insurance Fund/foreclosure predicament. He told Tribune Business that the Corporation had recently increased the insurance charge related to its mortgages, something that was difficult to stomach from a political viewpoint, because it increased the cost for homeowners. The likely solution, Dr Sands said, was a Bahamian version of the US Toxic Asset Relief Programme (TARP), where delinquent borrowers were allowed to remain in their homes even after the BMC (government) repossessed them. The borrowers would then become rent payers.