The Tribune

By NEIL HARTNELL

Tribune Business Editor

BAHAMIAN banking industry executives yesterday identified several flaws with the Progressive Liberal Party's (PLP) mortgage foreclosure plans, telling Tribune Business there was a more than-$100 million gap between the proposed Government guarantee and funds raised from the levy on homebuyers in good-standing.

No executive would go 'on the record', not wanting to become embroiled in a political controversy, but they said 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.

"The collective contributions to the fund would assist the Government to cover the interest costs of those borrowers who fall into delinquency," the PLP added.

"This, in turn, would help reduce the direct cost to the Government if called upon to make good on its guarantee. The Fund would be there to cushion the cost to the Government and, by extension, reduce the ultimate burden on the taxpayer."

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.

Noting that there was no consultation with the Bahamian commercial banking industry before the PLP announced its plans, one banking executive said: "The plan has some issues. We understand the effort to assist delinquent mortgage borrowers, but we need to examine what the implications are to banks' capital and profitability."

Capital and profitability would be heavily impacted if they were forced to write-off 100 per cent of the unpaid interest and fees accumulated by delinquent homeowners. The same would also likely happen if the DNA plan, for banks to take a 50 per cent "hair cut" on troubled loans, came to pass.

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.

Another banking executive noted that the PLP proposal was looking to reduce the interest rate on non-performing mortgages to Bahamian Prime plus 1 per cent in an effort to reduce the repayment burden on troubled borrowers.

Yet the executive noted that such loans should attract a higher interest rate, as the existing default had made them more risky.

"We've been working these loan books for the last two years, working assiduously to assist delinquent mortgage borrowers. To institute a 120-day foreclosure moratorium makes no sense. We've done all the above," one banker said.

Another, while agreeing that some form of government intervention may be warranted, urged that such a scheme be properly thought out. He warned against penalising borrowers in good-standing, and urged that those benefiting from any such scheme be "held accountable:" with monies repaid over time.