A RECENT CASE in the newspapers seems to indicate that people do not understand how bankers think, their constraints and their pursuits.
Take, for example, a case where a person owes the bank $500 000 for the mortgage of a property. The monthly payments are in arrears probably because the mortgage was taken out when the interest rate was enticing at 4.5 per cent. Due to the changing scenes of life in trouble and in joy, the mortgage rate has moved to eight per cent, or the mortgagor has lost his/her job or any such circumstance.
Two years have elapsed since the mortgagor has made a payment. The likelihood is that the bank has been paying the insurance to protect its security. The likelihood also is that land taxes are not paid and will have to be deducted from whatever the sale of the property fetches.
The bank cannot put the accumulating interest to profit; indeed, it has had to put
$250 000 of the outstanding debt against its profits at the insistence of its auditors. It decides to foreclose. The mortgagor cries foul or cries. Did the mortgagor not read the document when it was first signed or was he/she lost in the euphoria of the moment?
The best offer on the market is $250 000 – half of the outstanding mortgage. The bank has an offer. What is the bank supposed to do? Wait, hem and haw “like the cat in the adage”, what characterises most decisions today? The next offer may be $200 000.
It will sell for $250 000. However, the mortgagor claims that the value of the property is $750 000. Even friends want to help the mortgagor and would like the bank to agree to a revaluation of the situation, some form of compromise like further advertising to see if a better offer can be forthcoming. The bank says no. It will sell for $250 000, take its loss and move on. The staff has wasted too much time on this customer.
Well folks, you have heard the Wild Coot criticise commercial banks left, right and centre, even eavesdrop on their deliberation as a fly on the wall. Not in this case. While it is true that the bank must offer a reasonable chance for people in arrears to get back on track, banks are pragmatic and decisive – something lacking nowadays.
Banks here in Barbados have two “overseers”. There are the auditors who make the assessment of the true worth of their balance sheet and principally their loan portfolio where the majority of risk is usually found. Then there are the head offices in Trinidad and Canada. In both cases, the head office is concerned about the auditor’s assessment and the performance of the local staff and their ability to make critical decisions. The staff in local offices is fully aware of the monkey on their shoulder and the need to act decisively.
We in Barbados have over the last few years seen that what counts for the banks is the bottom line. Small savings accounts are considered a nuisance and are penalised by a monthly charge; banks at first welcomed the low interest rates except that they may have been outwitted by the Central Bank; excess savings lodged with the Central Bank have been loaned to the Government; banks are aware of the increasing risks in their mortgage portfolio; and banks are not “holders” of real estate. The local banker’s authority is limited.
These considerations would be foremost in the decision to foreclose on the fictitious mortgage mentioned above.
There is a further complication in dealing with home mortgages where the bank has to foreclose. The bank is under an obligation to dispose of a property at a reasonable offer. A court will give to the mortgagor an extended time to scout around for a purchaser. However, if after a long time – say a year or so – no buyer near the mortgage amount is found on the market, then the bank will be allowed to sell at the best price found.
So mortgagors, beware! I have been exhorting people to consider what they are doing when a 20-year mortgage is offered for the first three years at 4.5 per cent. When, not if, the interest rate goes up to eight per cent, you need to consider if you will be able to afford it.
Of course there will be circumstances beyond your control, circumstances like sickness or loss of a job to take into consideration. For a while the bank will work with the customer, but only for a while. There has to be a resolution. Either you sell or the bank sells. Read the mortgage document again. A copy is given to the borrower. Happy New Year, Barbados!
•Harry Russell is a banker. Email: quijote70@gmail.com