The Tribune

ANYONE who reads the local newspapers cannot help but notice the large number of distressed Bahamian homes advertised for sale by banks under their mortgage powers. Never before in the history of the Bahamas have so many families suffered the humiliation, personal loss and social dislocation associated with the loss of their primary financial asset, their home. There are about 95,000 households in the Bahamas, and it has been suggested that one in five homes with mortgages are more than 90 days in arrears in their mortgage payments. There is a high probability that many of these homes will be foreclosed on if the economy remains in recession. In hindsight, our governing bodies must surely acknowledge that many of these foreclosures could have been avoided had the Central Bank of the Bahamas used monetary policy to reduce the Central Bank Prime Rate from 5.25 per cent to 2.25 per cent or lower, instead of the anaemic move to only 4.5 per cent. Had rates been lowered three years ago, many more Bahamian families would still be in their homes today and this social tragedy could have been avoided. These distressed sales/foreclosures, however, will have a negative impact on the banks, current homeowners, potential home owners, the construction industry and the overall Bahamian economy. Banks must make provision for these sales, and consequently funds must be set aside, either from their current income or from their reserves. In either case, the banks will take a hit, which will be a concern if this housing crisis continues. Of course, the banks all recognise this, thus the reason why they have all increased their service charges over the last year. In some instances, these service fee increases were introduced with very little warning, if any, and on a selective basis. For example, the decision to charge the gas stations a 1 per cent fee for any deposit over $10,000 has further squeezed the already compromised margins of the retailers. I have been informed that over the next two years new accounting rules will be introduced, which will require the banks to mark to market. This means that the banks will have to alter the value of the assets on their books as the value of the asset changes with market conditions. Thus if the value of a mortgage decreases because of a distressed sale or foreclosure, then the bank will have to adjust ( mark down) the value of that mortgage asset on their books. This will pose some problems for the banks, because banks are allowed to lend an amount equal to a certain percentage of the total value of their assets. Thus the overall value of bank assets will be directly impacted by the number of foreclosures and distressed sales that have taken place at any point in time. Consequently, impacted banks will have to raise additional additional capital in order to be able to make the same number of loans as they previously did. This will be particularly painful for banks who lowered their lending standards to attract more business by reducing the required borrower's equity from 20 per cent to 5 per cent. Families with homes on the same street as the foreclosed homes will be negatively impacted, because the foreclosures will devalue their homes and the value of any bank loans/assets held by their banks. Potential homeowners will also be affected because, faced with multiple distressed properties, banks will tend to take a more conservative approach to lending and may increase downpayment requirements, making it more difficult for potential homeowners. All of this means there will be less economic activity in terms of home sales, legal and realty fees, real property taxes and utility bills paid, renovations and construction work, and retail purchases of household goods. Additionally, the banks will have the added headache and expense of maintaining and securing vacant homes, because if they fail to do so the homes will become vandaliaed, as has happened in the US. And they will have to have to further mark down these real estate assets. I believe there are three possible solutions to this foreclosure issue that could help reduce the number of foreclosures. The Government needs to immediately ensure there is a reduction in the Central Bank Prime rate, which will result in a decrease in the mortgage lending rates and thus lower monthly mortgage payments for all concerned. Second, the banks need to adopt the mindset that it is better to have half an apple than lose the whole apple, which means that they should take a financial 'haircut'. By this I mean that they could reduce the principal on their troubled mortgages by 50 per cent, and lower the interest rate on the mortgages, which in many cases would allow families to retain their homes. Third, the Government should take immediate steps to establish a Foreclosure Trust Fund. These funds could then be used to buy distressed loans from the banks at a discount from the original loan value. Then these homes could have been refinanced for the original homeowners at an interest rate of 3-5 per cent, which in most cases would have made mortgage payments affordable for families. A big part of the 'Bahamian Dream' is home ownership, and it is most unfortunate that this dream has become a living nightmare for many families because of circumstances beyond their control and a government /Central Bank that refuses to make use of monetary policy initiatives (lowering interest rates), as has already happened globally. The Minister of Finance, the Governor of the Central Bank and the Central Bank Monetary Policy Committee need to explain to the Bahamian public, especially those who have lost their homes, why they have adopted this inexcusable position. The Bahamas is in the midst of a housing crisis, let there be no doubt about it.