The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former Bahamas Mortgage Corporation (BMC) chairman yesterday likened plans to ‘securitise’ its loan portfolio to “junk bonds”, warning that this nation was already suffering a ‘sub-prime mortgage crisis’.

Dr Duane Sands told Tribune Business that talk of ‘securitising’ the Corporation’s mortgage book was “an attempt to pretty up and ugly proposition”, although the Bahamas’ growing ‘sub-prime mortgage’ woes had yet to reach “tipping point”.

This, Dr Sands said, would likely occur post-2015 when the Mortgage Corporation would experience “an explosive rate of redemption” of its various bond issues - owed largely to the National Insurance Board (NIB) and other investors.

With 35 per cent of the Mortgage Corporation’s loan portfolio still in arrears, and its “undercapitalised” Sinking Fund unable to meet the $100 million-plus redemptions, Dr Sands said the Government would be exposed to paying up via the guarantees it has given.

Securitisation, which was employed as a form of risk diversification, became the technique widely-blamed for sparking the 2008 financial crisis.

Banks packaged up their mortgage loans in pools, and sold off securities (shares) in these pools to other financial institutions.

The ‘buyer institutions’ were paid through the interest mortgage holders paid on their loans but, when borrowers started to default, these income sources dried up.

Financial institutions that invested too heavily in these mortgages, often issued to ‘sub-prime’ or less-than creditworthy borrowers, suddenly found themselves on their knees, resulting in a major crisis of confidence in the global financial system.

It is unclear if the Government is proposing to do similar by ‘securitising’ the Mortgage Corporation’s loan portfolio, but given its current arrears rate and existing financial woes, it is easy to see why Dr Sands is so negative.

“Those are junk bonds,” he suggested of the securitisation plan, which the Ministries of Housing and Finance are working on. “No willing buyer will buy it.

“It’s a non-starter. It’s an attempt to pretty up an ugly proposition. We already have a sub-prime crisis. It has not tipped yet, but the Government is doubling down on it.

“I tried to introduce some reason and bring the Mortgage Corporation back into some semblance of fiscal responsibility when I was there, but now they’re going about face and running it into the ground again, spending money they have no chance of collecting.”

Suggesting that plans to invest $60 million in the housing programme, via a phased injection from NIB, would further over-extend the Mortgage Corporation at a time when consolidation was necessary, the former chairman said it was “time to be a bit conservative and strengthen the at-risk Corporations”.

“The problem with the Mortgage Corporation debt is that it’s guaranteed by the Government,” he told Tribune Business.

“If the Bahamas Mortgage Corporation goes into default, you tip the Bahamas Government into a very, very difficult situation, because now the people coming to recover their bonds will expect the Government to pay up.

“When you look at the explosive rate of redemption of the bonds, starting in 2015, I don’t know where the money is going to come from, as the Mortgage Corporation is not generating enough money to pay for these loans. The Sinking Fund is already under-capitalised, so we are about to witness our own sub-prime mortgage crisis.”

Dr Sands conceded that if the Mortgage Corporation selected borrowers in good financial standing, and who were willing and able to service their loans, then the latest $60 million housing investment might stand a chance of generating “reasonable returns”.

Yet he suggested borrower selection, and the decision to re-start the programme and forget restoring the Mortgage Corporation to health, was being driven by politics and the Government’s need to fulfill some of its election promises.

Dr Sands added that NIB was likely an “unwilling buyer” of the Mortgage Corporation’s bonds, and its lender, but had little choice as it would be told what to do by the Government.