The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s recently-unveiled regulatory easing is unlikely to “open up a new avenue of mortgages” being issued to Bahamian home buyers, a senior banker said yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that eliminating the need for borrowers to take out mortgage indemnity insurance to qualify for a lower down payment will likely only help a very small market niche.

He added that the Central Bank’s move was “really just linking the commercial realities to their regulatory framework” as mortgage indemnity insurance had not proven to be a valuable tool in protecting the industry against the risk of borrower default.

This, Mr Bowe explained, was because most mortgage holders typically defaulted when the loan-to-value (LTV) ratio was around 80 percent. At this point, mortgage indemnity insurance - which is used to “get over the hump” between an 85-95 percent LTV - is effectively “null and void”.

“Candidly speaking, I think the action by the Central Bank is more about aligning the commercial realities with their risk management strategies,” the Fidelity chief told this newspaper. “They had raised the question with their regulated entities as to whether mortgage indemnity insurance was really a valuable instrument to the industry.

“The statistics and empirical evidence demonstrate that most financial institutions will not lend where they expect an instant default... The mortgage indemnity, unfortunate to say, was really a premium generating exercise for the insurers because the level of claims and payouts related to it were almost nil.”

Mr Bowe said mortgage indemnity insurance also “served as a greater barrier than people appreciated as customers had to come up with the premiums. It’s almost like swapping the down payment for the premium and it would be added on to the loan. In most cases, most institutions wanted the premium paid in advance of the loan”.

Describing it as “a well-meaning instrument”, he added that ultimately represented little value to commercial banks and other formal lenders. “In the current environment, the greatest driving factor is free cash flow and the ability to meet loan payments,” Mr Bowe said of the key determinants that will decide whether Bahamians qualify for residential mortgages.

Prospects of continued cash flow, and the industry the borrower works in, are also taken into consideration along with the debt-to-income (debt service) ratio given the likelihood borrowers already have existing personal and consumer loans.

Mr Bowe described loan collateral/security as “a credit enhancer” rather than something that will result in “very favourable underwriting decisions” given the difficulties all banks encountered in realising delinquent assets and offloading them quickly in the aftermath of the 2008-2009 financial crisis.

Without mortgage indemnity insurance, residential home buyers had to come up with 15 percent or more of the total purchase price from their own pocket. The Central Bank has also given the Bahamian commercial banking industry the go-ahead to assess the risk posed by individual mortgage borrowers on a case-by-case basis, thus providing more flexibility on the down payment demanded from home buyers.

The Central Bank, in unveiling the mortgage easing, warned, though, that the 50 percent debt-to-income lending ceiling limit still applies for borrowers. “The Central Bank of The Bahamas is relaxing the guidelines for domestic banks and credit unions on the minimum equity injection requirement for residential mortgages,” it said.

“While this is not anticipated to have a significant impact on personal lending, it should reduce the cost burden for suitably qualified borrowers and allow some additional individuals to qualify for credit. With immediate effect, the mortgage indemnity insurance is removed from the Central Bank’s stipulation for borrowers to qualify for a reduced equity or down payment amount on residential mortgages.

“In the absence of the insurance, the minimum down payment for such mortgages was 15 percent. Moreover, in line with the Central Bank’s relaxed rules for other personal lending, issued in August 2022, financial institutions may also vary or set lower down payment requirements for residential mortgages, in line with their internal frameworks for assessing and managing individual borrower risks.

“However, lending institutions are directed to observe that personal lending is still subject to the borrower’s total debt service ratio remaining within a prudent limit of 50 percent,” the Central Bank added.

“The exceptions are debt restructurings and/or consolidations for borrowers who are already indebted beyond this threshold, and for whom outstanding obligations are not increased as a result of the restructuring and/ or consolidations.

“Lending institutions are also directed to exercise continued prudence around the amount of credit extended as a percentage of the appraised valuation of the real estate, or the resulting loan-to-value (LTV) ratio. The LTV ratio also determines the risk-weighted treatment for mortgages when estimating banks’ capital adequacy.

“In particular, in accordance with The Bahamas capital regulations 2022, residential real estate exposures are weighted at either 25 percent, 50 percent or 100 percent, respectively, according to whether the LTV is less than or equal to 60 percent, between 60 and 80 percent, or exceeds 80 percent.”