The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A key Ministry of Finance adviser yesterday said the draft Borrowers Protection Bill “challenges some very fundamental and long-held concepts” relating to the sanctity of private contracts, adding his voice to those urging that the legislation be heavily modified before going to Parliament.

James Smith, a former minister of state for finance and Central Bank governor, told Tribune Business that the Christie administration’s proposed Bill “needs some work”, and that there were several key issues and potential consequences that needed to be addressed.

Questioning whether the already-stretched Supreme Court system would be able to handle the increased workload resulting from the inevitable increase in delinquent mortgage cases coming before it, Mr Smith agreed that the Bill - as drafted - would both increase borrowing costs and reduce credit availability.

And, while acknowledging that something needed to be done to address the Bahamas’ delinquent mortgage crisis, Mr Smith said the Government had to avoid unintended consequences “that can happen very easily in this kind of setting”.

“I don’t expect the draft that seems to have found its way into the public domain to ultimately be the one that is passed,” Mr Smith told Tribune Business. “It needs some work.

“On the surface, it appears to challenge some very fundamental and long-held concepts regarding contracts.”

The current Borrowers Protection Bill appears to directly intervene, and insert itself, into contracts already agreed between Bahamian borrowers and lending institutions, such as commercial banks and insurance companies, overriding what the parties have previously signed up to.

The Bill, which has been obtained by Tribune Business, appears designed to make delinquent borrowers more secure in their homes, while making it much harder for the lender to repossess and sell the property.

When it comes to delinquent residential mortgages in the Bahamas, most banks and lenders usually exercise their power of sale under the mortgage contract if they and the borrowers are unable to resolve the situation, rather than go through a formal foreclosure.

That was before Clause seven of the Bill, which “seeks to make provision for lenders to provide a reasonable period for persons who obtain mortgages for dwelling homes to make arrangements for payment of arrears before exercising the power of sale”.

In its current form, the proposed Bill would require the lender to give the delinquent borrower 30 days’ notice of its intention to exercise the sale power, giving the latter time to go to the Supreme Court.

While only those who have paid of at least 50 per cent of the mortgage balance, or have suffered a change in their financial circumstances “beyond their control”, would qualify, the Bill allows the Supreme Court to postpone the property’s sale for at least 12 months.

And the Court also has the authority to determine a reasonable payment plan for the borrower - effectively tearing up the contract with the lender.

Acknowledging the ramifications of this and other clauses, Mr Smith told Tribune Business: “It also seemingly puts a huge burden on the courts, and whether the courts have the capacity to determine a person’s ability to pay.”

Expressing doubts that the Supreme Court would be able to accurately calculate a delinquent borrower’s true income, he added: “We also have a cluttered court system in the Bahamian context. These issues have got to be addressed.”

Asked by Tribune Business whether the Borrowers Protection Bill would ultimately increase borrowing costs for Bahamian mortgage consumers, and make commercial banks more skittish about lending, Mr Smith effectively agreed this would result.

“As it stands now, once you change the risk profile, the availability of credit and cost of credit changes with it,” the former finance minister told this newspaper.

His views were backed by a senior Bahamian commercial banking executive, who explained that any impediments preventing lenders from easily securing collateral for mortgage loans would inevitably make the secure more reluctant to extend credit.

And, with the risk attached to lending increased, borrowing costs (interest rates) would also rise, impacting the ability of Bahamians to own their own home, with knock-on effects for the real estate and construction industries.

“The general view is that the Bill in its present form will not be put before Parliament,” the Bahamian banker said. “The conditions are so onerous that lenders will withdraw from lending, and the economy revolves around credit and consumption.”

They also pointed out that the Borrowers Protection Bill would create significant moral hazard, encouraging borrowers not to meet their loan obligations due to the repossession obstacles.

For instance, the proposed Clause four “provides for the granting of relief to the borrower from consequences of the breach of a covenant or the non-payment of the principal or interest of the loan”.

Other clauses give borrowers time to remedy their breaches, and the ability to sell their delinquent property.

“I think that at the end of the day, hopefully whatever goes for consideration by Parliament is something all stakeholders can live with, because the original draft was prepared with very little input from the major stakeholders,” Mr Smith told Tribune Business, meanwhile.

“You don’t want any unintended consequences. That can happen very easily in this kind of setting.”

He also pointed out that the Bill gave certain borrowers “special treatment”, namely those who have paid 50 per cent or more of their principal balance qualifying to block the sale of their property.

Still, Mr Smith said it was vital that the Bahamas address its mortgage crisis, given the implications for the housing market, and associated sectors of banking, construction and real estate.

Pointing out that the home was traditionally the “largest investment” made by households, the former finance minister added: “It can have adverse effects throughout the economy. It changes your whole consumption pattern, you change your habits and question the system we operate in, so it’s very important we try and stabilise that asset class.”