The Tribune

By NEIL HARTNELL

Tribune Business Editor

A LEADING architect of the Progressive Liberal Party's (PLP) mortgage relief plan is arguing that its so-called $105 million 'funding gap' would be covered by insurance, ensuring the Bahamas' "national financial position is not put at risk".

Responding rapidly to criticism voiced by Bahamian commercial banking industry executives, Franklyn Wilson, chairman of Arawak Homes, told Tribune Business that "any way you skin the cat", it was possible to insure the potential financial exposure created by the gap between the proposed government guarantee and funds raised from a levy on homeowner participants.

Insisting that the PLP plan "makes sense for the country", and calling on Bahamians to forget "partisan politics" and the impending general election, Mr Wilson said London-based insurance executives had told him it was possible to purchase insurance that would cover the government guarantee - thereby limiting any potential exposure for the Public Treasury.

Mr Wilson, who is also the chairman of RoyalStar Assurance, even forwarded Tribune Business an e-mail exchange between himself and the Bahamian general insurer's managing director, Steve Watson, to back-up his assertion.

In the e-mail, Mr Watson wrote: "As discussed, I believe that given the maximum exposure and self-retention can be clearly determined, it should be possible to find a solution either within the conventional insurance market or the capital markets, subject, of course, to an adequate premium being charged.

"It will, however, be necessary to obtain very high resolution data to allow the relevant actuarial work to be carried out."

Mr Wilson, for his part, told Tribune Business: "We are talking about an insurable product. You end up with, under the guarantee, with certain losses under certain circumstances which contacts told you leave the funding gap at $100 million.

"The fact anyone can do that calculation is saying the risk is identifiable and, two, measurable. Any risk that is identifiable and measurable is insurable. If you can identify and measure it, more often than not you can insure it. You can go to the insurance market if the risk can be defined."

The Arawak Homes chairman added that under the proposed PLP plan, the Government - after doing the necessary actuarial projections and studies - would be able to go to the global insurance markets knowing the maximum value of what they wanted to insure under the guarantee.

"The first thing the market says is how much deductible are you willing to pay," Mr Wilson said. "The higher the deductible, the lower the premium. It's for the Minister of Finance to make a judgment as to how much liability he is prepared to take on, and how much he is prepared to lay-off."

If the Government chose to pay a 10 per cent deductible, as per Mr Wilson's suggestion and the $105 million 'funding gap' calculation, it would be exposed to a $10.5 million loss in a worst-case scenario, with insurance covering the rest. A 20 per cent deductible would leave the Government with a $21 million potential exposure.

"The point I'm making is, any way you skin the cat, you're not talking about a quantum of money that puts the national financial position at risk, because it's insurable," Mr Wilson told Tribune Business.

"The amount of premium will be influenced, no doubt, by the insurer's sense of how soon the job market will expand. If you believe the economy is going to grow, more of those people who are delinquent on their loans will be able to bring themselves current or change their circumstances.

"Implicit in that is if people in these distressed properties will reduce in number, the $100 million only arises if there's no growth."

And, taking on fears that the PLP proposal would result in 'moral hazard', encouraging people to believe that the Government would cover their backs if they defaulted on their mortgages, Mr Wilson said he felt such sentiments had a "political bias" to them.

He pointed out that the Ingraham administration had already intervened in the 'free market' in various ways to help out "distressed" Bahamians, most notably through the various payment plans offered to Bahamas Electricity Corporation (BEC) customers.

In another sign that criticism of the mortgage relief plan has alarmed the PLP and its advisers, another of its 'architects', senior Colina Insurance Company executive Lynden Nairn, told Tribune Business that only delinquent borrowers selected to participate in the scheme would be charged a levy equivalent to 0.5 per cent of their outstanding debt balance.

Noting that "not every single' delinquent borrower, who holds a chunk of the Bahamian banking industry's $450 million pile of non-performing mortgages, would qualify for the proposed scheme, Mr Nairn said the PLP was seeking to work out an arrangement with lenders where plan participants paid a reduced interest rate of Bahamian Prime plus 1 per cent - 5.75 per cent.

This, he argued, would have the advantage of reducing monthly mortgage payments, potentially bringing many borrowers unable to meet a higher sum - at an average 8 per cent interest rate - back into good standing.

"If you have $200 million of mortgages participating in this initiative, you have the banks recognising additional income of $11.5-$12 million per year from this alone," Mr Nairn told Tribune Business.

"It brings relief to thousands of Bahamians, and ensures hundreds of homes are taken off the inventory of homes for sale."

Estimating that there were around 3,000 Bahamian mortgage borrowers in default, and in danger of losing their homes, Mr Nairn said removing the over-supply of distressed properties would lead to buyers eyeing new construction instead of seeking such deals.

This, he added, would boost the construction industry and other sectors reliant on the housing market. In addition, by removing distressed assets from bank portfolio's, Mr Nairn said $50 million of costs would be removed from the industry, boosting their capital and solvency margins, and encouraging renewed lending.

This, in turn, he argued would stimulate sectors such as real estate and attorneys. "With all this increased economic activity, one would expect the Government's revenues to increase," Mr Nairn said.

Noting that the plan was to run for five years, he added that if 9 per cent of borrower participants became delinquent during that period, the net cost to the Government would be "zero".

"If 20 per cent of them defaulted in a five-year period, the net cost would be a maximum of $1.5 million per year," Mr Nairn said. "The increase in government revenues would more than pay for $1.5 million associated with delinquencies. It's a simple plan. It's a win-win for everybody."