Pushing 100 per cent mortages smacks of desperation

WEDNESDAY, APRIL 4: Last week I suggested that there might be an element of desperation in this Government’s response to what is happening now. A couple of people took issue with that, suggesting I was being melodramatic.

I wasn’t. As is my habit, I was being carefully accurate and honest.

Proof of Government’s desperation lies in their new, strong, sustained effort to sell the new housing units on South Shore Road, Warwick.

Globally, good financial managers have learned — the hard way — that 100 percent mortgages to new or first time buyers of ‘affordable’ or lower market price housing units are a bad idea.

From the 2007 sub-prime housing debacle, good global financial and government managers have learned that house buyers need to be able to afford all their house-buying costs. The rest of the world’s good managers have backed off from ‘no money down’ house buying.

So, in 2012, why is the Bermuda Government suddenly and aggressively pushing forward with 100 per cent mortgages?

Disregard Butterfield Bank’s part in this. In advancing the 100 per cent mortgage, the bank is taking no risk whatsoever. All the risks are taken by the Bermuda Government, which backstops the Bermuda Housing Corporation [BHC].

Home ownership

The overall financing arrangement conforms to an agreement made in 1992 when the UBP (remember them?) was in power. Through a put-option, the bank can require the BHC to buy-back any non-performing mortgages. This enables the BHC “...to promote home ownership without having to borrow to fund such lending, and the borrower is able to secure financing, which would not have been possible without the Corporation’s involvement.” [BHC Annual Report 1999, page 9].

Simply, if a BHC approved, no-money-down buyer of a BHC connected property defaults, the bank merely takes the mortgage back to BHC, gets its bank money back, and strolls away. The bank absorbs no part of the loss. The full loss falls to the BHC — thence to the Bermuda Government.

The 2007 sub-prime experience taught a hard and absolute lesson. In 2012, five years after that lesson began to be taught and learned; the Bermuda Government is aggressively pushing a ‘no-money-down’ 100 per cent mortgage programme for this 125 unit housing project at South Shore, Warwick.

I am honest and accurate in describing that as an act of desperation.

In another act of desperation, but this one lying ahead and not actually happening now, this cash-short Government can easily raid the under-funded Public Service Superannuation Fund [PSSF]; just as, in this year, it will raid the Sinking Fund.

Government’s audited statements for 2010/11 show that the PSSF should have about $1,394m in it. Instead, it actually only has $469m. So the PSSF is currently under-funded by ($1,394 - $469) $925 million.

After all the accounting and actuarial stuff, the under-funded PSSF still actually has $469m of cash that is largely invested overseas.  This cash rightfully belongs to the BPSU civil servants and BIU industrial employees, who, over the years, have been paying-in their money in the belief that after over forty years working for Government, when they turn 65 and retire, they will begin receiving a pension. However, this $469m of pension cash is controlled by this cash-strapped Government.

This cash-strapped Government has already taken several other steps of quiet desperation.

Offering 100 per cent mortgages; not paying into the under-funded PSSF in FY 2012/13; and raiding the Sinking Fund for $50m to meet the short-term need to make a $50m Debt Interest payment due in FY 2012/13.

Last week I suggested that Government might print more money. A logical next step, in addition to or in place of printing more money, would be to direct the sell-off of foreign assets currently held by the PSSF, and repatriate those funds to Bermuda.

Once repatriated, use those funds to buy newly issued Bermuda Government Bonds, and pay the interest on those bonds in Bermuda dollars.

Without having to go to foreign lenders, that would immediately pump millions into Government’s cash-starved coffers.

However, for current and future pensioners, that would be an unwise financial action because it would have near-term and then strong long-term negative impacts on the value of all pensions paid from the PSSF. So such an act would be an act of desperation.

As always, I am being carefully accurate and honest in making these comments. I have neither desire nor need to fool or trick anybody, or hide anything from anyone.

I believe in accuracy and honesty. I passionately dislike obfuscation.