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Ok, so my updated thoughts on the mortgage moves currently hitting JA. I've spoken before about the coming of this and we saw 1 player go to 100% mortgage's a few weeks ago, and then JN made waves with the 110% mortgage offer. Here's my thoughts on why this was inevitable...
Over the past 10 or so years, the Finance sector has gotten more structured and inevitably more competitive. Credit Unions have stepped up their offers, which put the heat on commercial and merchant banks. Within their own space the fight has also been rabid, led by 1 giant, NCB.
The fight I refer to there is the general fight between institutions, and as we know, competition between companies, means better products/services for the consumers. (See: Digicel/CWJ and JA having 2.8M people, but over 3M phone service subscribers and huge internet penetration)
Within the Financial Sector NCB is currently King (Queen?). It is however, NOT the leader within the mortgage space, that title belongs to JN, who is considered the largest private mortage lender. Their loan portfolio is over $77B.
So it really isn't surprising that they would lead the charge in what i'm officially calling the start of the mortgage war with their 110% offer... Now like many war's those in the know will tell you that this wasn't the true start. It started earlier but the 110% grabbed eyes. 
Of course, it also grabbed hearts and sent fears through a population who is easily scared by anything to do with money and numbers. I'll address the fears separately, for now I'll just talk about the need and the drive to start the war.
...And this has already gone on too long so expect a lot of oversimplification. Here's the facts. NCB's record profits, have come on the back of stellar corporate growth. Their loan portfolio is strong, but can use improvement, in some areas, Mortgages are one such area.
They know this, and they also know that wherever the giant turns her (🤔) gaze, things get very interesting. People who pay attention to business also knows that at the start of any competition, the current giant in that sector stands to lose the most, aka JN. Make sense now?
The banks also, just like warring states, actually drew the battle lines earlier. Anyone paying attention would've noticed & predicted the moves. Here's an article from June 2018 where NCB fired an early warning shot, publicly aiming for 40% of the market. jamaica-gleaner.com/article/busine…
So, we have 2 giants, one larger than the other, but one better than the other in a certain arena. The larger Giant #1, says he's gonna enter that arena, & own 40% of it. Giant #2 (who owns that arena) starts to warm up...the 110% (which was around from last yr 🤫) is the warmup.
So why enter there if you already have record profits? Because that's the general nature of companies, especially listed companies. Last year's record, is this year's pass mark. That's how you please shareholders (owners). Deliver more value (profit/dividends) to them each year.
Now 2 additional points, and these are just my personal thoughts. reasons why they went into mortgages;
1. To Help NCB Bank.
NCB is a Group of Companies, though we tend to think of it as just the bank. It's actually called NCBFG, NCB Financial Group. The bank is just 1 arm.
1. To Help NCB Bank.
NCB is a Group of Companies, though we tend to think of it as just the bank. It's actually called NCBFG, NCB Financial Group. The bank is just 1 arm.
NCB Bank is not as profitable as NCB Group. In fact in last year's record $28B profit, only 10% came from NCB Bank. NCB Bank however, is still vey much core to NCBFG's operations, & any loan growth there has the ability to grow every other biz line...especially Insurance.
So NCB Bank "needs" mortgages, because they make most of their money off loans (not fees like commonly thought, $20b off loans v. $4.8b off fees), and mortgages are some of the "safest" loans since even if you don't pay, the land isn't going anywhere. It's self collateralized.
So, thats enough on point 1, and yes it was very NCB focused. Thats because I expect NCB to create the next wave in the market. JN has struck with 110% mortgages...& I hear (UNCONFIRMED!) that the rate is 8.69%. This is close to average. The pic shows the avg rate in Jan 2019.
Granted I dont know the full terms or life of the loan, and you should always know those things BEFORE signing any loan. For a refresher on what to look for in ANY loan, read this piece I wrote last year. jamaicatoday.com/what-to-look-o…
So, the second (personal) reason I think mortgages are getting the attention? Because a mortgage is what I think of as a watershed purchase. After you buy a house, your general life spend goes up. Furniture, maintenance, fixtures, paint, housewarming parties, etc., etc., etc.
And who benefits from a stronger economy? Everybody....but banks feel it 1st. So to drive the economy forward (and their own profits), they put the attention in the area that can provide them with the most growth and the least risk.
The risk is a key point because despite our growth, Jamaican financial institutions are still VERY risk averse. This risk aversion has contributed to our economic stagnation, and now that the sector is getting more risk tolerant, better offers are reaching consumers. Win-Win.
Which then brings me to the fears a lot of people have. CREDIT SUBPRIME MORTGAGE DERIVATIVE DEFAULT OMG!!!!!11ONE!!!!!!. I hear it, and sadly I hear it along with a tinge of something...less than desirable.
There seems to be the thinking in JA that you're SUPPOSED to save for yrs & yrs & yrs to cover your deposit & then you can buy a house, be "house broke" for 1- 3 years, then slowly get back to a better financial place. It's always been that way, so it should always stay, right?
The fear I hear articulated is that if you give people a chance to buy a home without the years of savings previously, then the banks run the risk of a majority of them defaulting and causing an economic crash like in 2007/8 in the US...this is not logical.
1. The Subprime Mortgage Crisis was more complicated than failed loans causing a crash. Simple Version: Very bad loans (subprime) were bundled & sold as "safe" investments (DONT TRUST BROKERS!) which caused them to be the backing for many more important things in other sectors.
Many of the subprime loans had variable rates. When they spiked, subprime (bad credit) borrowers, couldn't pay, & suddenly all the bundled bad loans were worthless. This still would've been ok but the "safe" lie had caused it to spread outside the sector. Boom, general collapse
Yes, that COULD happen in JA, but it'd require our banks to break DECADES of risk averse behaviour & suddenly go to the total extreme. Suddenly the same banks who make entrepreneurs jump through 7,583 hoops for a biz loan are going to lend people with little income house $? Nah.
What'e more, the memory of FINSAC is still VERY fresh within local financial memory. The people running banks now came up in FINSAC, the prudence they learned as second nature isn't going to disappear overnight. We will be alright, & if not, we'll see the signs FAR ahead.
One simple way to check for the signs of trouble is to look at what %age of overall loans are going bad (not being paid for more than 3 months). From 2016 - 2018 the percentage of bad loans grew by 7%, however overall loans grew by 22%, almost 3 times larger.
This simply means that yes, more people are defaulting on their loan obligations, but almost 3 times as many people are getting loans so viewed that way, the fear is not warranted. Looking deeper, the default rate for Building Societies has actually fallen!
To be fair though, that fall was impacted greatly by JN becoming a Commercial bank during that period, but regardless, a default rate of 7% is nothing to fret about. Also, lets be honest, the 110% mortgage wont be easy to get. Your income has to be STRONG to qualify.
That brings me to the point of why this makes sense for our society currently and why I view it as a good thing. Mortgages are income dependent. The 100%+ mortgages are an opportunity to open up home ownership to a wider circle. A circle who can only qualify via income anyway.
So now assuming you qualify for a 110% mortgage, what the bank is really saying is "Youre able to make the monthly payments on a loan of X size, so feel free to buy a house where the (Cost of the home+10%)=X." Straightforward, right? Why on earth should this be looked on badly?
If my salary is $400k monthly (about 300k after taxes), and I can save $100k out of that but pay rent for $75k monthly....why on earth should I spend TWO AND A HALF YEARS saving a $3M deposit when I can service a $23M mortgage immediately? Who does me wasting 3 years benefit?
Whats more, why should I wait 2.5 years when the Real Estate Market, especially in Kingston and closer parishes, moves so quickly? What's sold for $23M 3 years ago is now in the $30M range, easily. And I dont have to mention the popular skyrise apartment prices in Kingston now.
And if the concern is for payment ability...the monthly repayment on a 40 year, $20M mortgage at 8.5% is 147k monthly, while the payment on a $23M mortgage is $169k. So $22k JMD monthly is supposedly the difference between a "safe" mortgage and a crashed economy 🙄.
So pay $22k more monthly for a $23M house immediately? ($20M house+$3M deposit+fees+taxes [15%]) OR wait 3yrs, save $100k monthly if you can, meanwhile hoping you don't get priced out of the market. Then in 2022, you can buy whatever is going for $20M & STILL pay $147k monthly 🤷🏾♂️
That is how I see it, that is the real question. Is there something wrong with people getting loans that their salary can service? Is there some special safety in making a person wait years to save a deposit if they can service a bigger loan now? I dont see it.
Now there are other concerns yes, the interest rate is a major one, so is years to repay. People seeking mortgages should be aware of the terms, and how much they'll be paying back. Understand what you're signing to! But as I tweeted in Nov 2018...
