Whatever happens on the international front eventually reaches the Caribbean and while the effects of global recession took their time to penetrate the region, the damage since 2008 has been huge. Small island economies have struggled to come to terms with austerity methods and trying to tax your way out of the problem coupled with high borrowing has certainly not worked in the Barbados economy. It remains to be seen if the government can turn it around amidst widespread criticism of their strategy and performance to date.
The damage to the second home market and by association the construction industry has been profound. Second homebuyers virtually disappeared in the early years of recession and although the market is showing signs of recovery, it is a far cry from the halcyon years pre-2008. Less building has meant less supply although in time the delicate balance between supply and demand will produce a more competitive market place. But the cost has been painful with higher unemployment, less work in the pipeline, shorter working hours, and a serious trimming of expenditure. The knock-on effects in the financial sector have been tough. Lenders tightened their terms and conditions, although too late to avoid serious damage and while they have tried to work with delinquency, it was inevitable it would increase in both the commercial and domestic sectors. High provision for bad debt has seriously dented the annual figures for banks in recent times and newspapers are now regularly advertising repossessions and auctions, something of a rarity in Barbados previously. At the same time lenders must lend or their business model dies. And they live with the memory of their huge contribution to global demise, as it was lenders that sparked it off through reckless lending, fabricated assets, tardy regulation and a serious lack of accountability and consequently credibility. At local level only the lenders themselves know how much this impacted their assets, but there is a general feeling that the conservative approach to lending over many years on the island cushioned the blow.
Six years later we live in a different world and we’d like to think lessons have been learned. The problems in Barbados were miniscule compared to what happened in the United States, the UK and Ireland. Our prudent lending and conservatism probably saved our bacon, but the American, UK and Irish taxpayers were not so fortunate as their respective governments had to bail out lenders with billions of taxpayers’ funds. Governments have since kept closer cognizance and involvement in the financial sector, not least as they have a colossal ‘investment’ in it and perhaps to help erase the shocking lack of regulation by government that a number of financial scandals exposed.
Against this background the UK’s Financial Conduct Authority has recently ruffled a few feathers in the industry especially with many lenders and prospective borrowers. Its Mortgage Market Review has brought into effect more detailed scrutiny of the mortgage application process and in particular the applicants’ lifestyle and how it might impact on their ability to repay a loan. As we all know there are a number of security checks already in place strengthened by limitations on Loan-to-Value, but the new measures will go a lot deeper into everyday expenditure and include such items as holidays, club memberships, dining-out, car choices and household expenses. There will also be stress tests to assess how the applicant can handle an interest rate increase or change in their circumstances. Some lenders have already adopted more scrutiny, but these measures go far and beyond what has gone before and have already annoyed potential borrowers and lenders.
The tighter lender regime will place a lot more value on using Financial Advisors and Mortgage Brokers as they are the experts in the mortgage field and will help applicants get their ducks in line long before they sit down with a potential lender. The new measures have not been adopted in the Caribbean yet, but rest assured local lenders will be watching with considerable interest given the volatility in mortgage lending in recent times. And they won’t be waiting for a government Watchdog to guide them, as they will see it as prudent diligence and better lending going forward.
It may not appear so at this stage, but ultimately that helps everyone.
Clarence Hiles is a Director in Caribbean Mortgage Services with over 35 years experience in the lending industry. He can be contact at 246-2309215 or by email at Clarence@caribbeanmortgages.com