The Tribune

• Bank chief unveils distressed property solution
• Gov't 'worsening' situation by new home builds
• Will free loan capital, offer affordable housing

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fidelity Bank (Bahamas) stands ready to "put money behind" a properly structured investment vehicle that could cure this nation's housing and distressed mortgage woes, its top executive said yesterday.

Gowon Bowe, the BISX-listed lender's chief executive, renewed his call for the Government to work with the private sector in creating a real estate investment trust (REIT) or alternative financing mechanism that could take delinquent properties off commercial banks' books at a fraction of their true worth.

Warning that the Government's construction of new subdivisions was merely "exacerbating the problem" created by non-performing mortgage loans, which continue to "tie-up" bank capital and deter the sector from further lending, he told Tribune Business that the vehicle he was proposing could both unlock private investment and held solve The Bahamas' shortage of affordable housing.

Asserting that the REIT or similar vehicle would have to be structured so that it was independent of the Government, with an autonomous Board and professional managers, Mr Bowe told this newspaper that it would be the catalyst to develop a "vibrant" distressed housing market of the sort that exists in many other nations but not The Bahamas.

Gateway Financial and its Mexican partner, Ascendancy, are the only specialist players to emerge in this niche in The Bahamas to-date. Asserting that their efforts have been relatively successful, the Fidelity chief nevertheless argued that a more comprehensive solution is needed with his bank's non-performing mortgages accounting presently for 30 percent of that loan niche.

And, while acknowledging that the REIT proposal might be perceived as self-interest, Mr Bowe pledged that Fidelity Bank (Bahamas) was ready to put its money where its mouth is by investing its own money in a properly-structured distressed housing acquirer by purchasing any securities it issues.

Revealing that he has presented this concept to multiple administrations without success to-date, he said: "If you have a significant portion of properties in distress because people cannot make payments, those are on the banks' books. Banks don't really want to be property owners; that's not our mandate.

"The bank doesn't want persons coming in to inquire: 'Can you sell me a home?' They want to loan them money to buy a home. A non-performing loan has effectively been converted into a physical asset because you're now in a state of saying you can only realise a recovery through the sale of the house. You've effectively become a property owner trying to sell a home.

"When there is a significant amount of capital tied up in non-performing assets it creates several issues for the banks." Mr Bowe said Bahamian lenders, in taking over and repossessing distressed properties, and exercising their power of sale, are faced with hiring realtors, property managers and others to keep the real estate in its "maximum value state". And "time and energy" from bank staff is also required to address the delinquent mortgage loans.

"If you have a tremendous amount of distressed properties with owners unable to pay for it, and which have tied up bank capital and, at the same time, have government expanding housing through building new properties, you have left a significant deficiency in your economic system," Mr Bowe argued. "Building more homes only exacerbates the problem.

"One of the core elements that has certainly struck home for us is that the Government needs to be careful with new housing initiatives when we have such an inventory of distressed properties. It means that banks take possession, but have capital tied up in these properties. When you are building more new homes you are not resolving that issue; you are exacerbating that."

Mr Bowe said his REIT proposal would help to eliminate the overhang created by distressed properties that are clogging up banks' balance sheets, thus freeing up money for productive lending purposes once again while also getting more Bahamians into existing properties at an affordable price.

"The concept is how do you get the unproductive sector in the housing market productive again," he added. "There's a couple of components. There's capital. The banks have capital, but we don't want to be in the business of property managers; we want to make loans. How do you attract persons wanting to invest in non-financial products like real estate? If you have a structure that allows capital to be raised and buy distressed properties at a fraction of their value.

"We know the banks want to divest those properties because that's not their business. We know there's a need because the Government says there's a housing shortage. The REIT effectively would combine supply and demand, saying here's a supply of distressed properties and demand for distressed properties? How do I get these working together? The REIT allows me to acquire distressed properties at a fraction of their value."

Mr Bowe said the "vast majority" of Fidelity Bank (Bahamas) current non-performing loan portfolio are mortgages, with "in excess of 30 percent" of that loan type now 90 days or more past due for payment. The Central Bank's December 2022 report said 10.2 percent, or more than $1 out of every $10 tied up in outstanding mortgage loans, is delinquent, and the Fidelity chief estimated that the industry average for distressed properties is around 20 percent.

Bahamas-based commercial banks have become increasingly skittish on mortgage lending since the 2008-2009 financial crisis, which resulted in hundreds of millions of dollars in mortgage arrears piling up on their books that took years to move due to the difficulties encountered in selling them on to new, qualified purchasers. This has left them more reluctant to extend credit for home ownership - the biggest investment most people make and a vital economic driver.

Mr Bowe, affirming that his proposed REIT would have to be autonomous from government and run on commercial principles, said there was sufficient room to acquire distressed properties for cents on the dollar, invest to upgrade them and sell at a profit while still enabling the buyer to access affordable housing at a discounted price.

"We need to become more creative in getting money flowing in the banking sector," he added. "If non-performing loans are taken off the books of the banks, they will have an incentive to lend in the mortgage space more aggressively. It has the dual benefits of getting liquidity back into a non-performing sector of the banking industry but also getting persons into homes are more affordable prices."

Mr Bowe said the REIT would also provide flexibility and portfolio diversity through being able to enter into a variety of transactions other than the purchase of distressed homes and their resell. He added that social housing, rent-to-own and leases were all other opportunities it could explore.

"We've even said to the policymakers that Fidelity would be prepared to buy bonds or mortgage-backed securities which the REIT may offer to help finance their acquisitions," he told this newspaper. "It changes the risk profile. This is not an idle idea we have expressed if it's appropriately structured with the right governance and right professionalism be brought to bear.

"It converts some of my current non-performing, non-income portfolio into new assets that are more diversified. It opens up opportunities for that market to move and my investment risk to change. It's a bit of a snowball effect. If we can roll this snowball up the hill and get it moving we may be surprised at how big it becomes."