Prime Minister's Address on Home Ownership Day 1999
Thank you Mister Chairman,
I am delighted to speak to you today at the inaugural launching of Home Ownership Day in St Lucia. I commend the Eastern Caribbean Home Mortgage Bank for embarking on such an important event. It couldn’t have come at a more opportune time.
It would be easy for the casual observer to think that a forum such as this will not generate the level of participation expected. After all, it is a novel event; it is Monday and people are expected to be at work. I am truly heartened by your presence.
MONETARY CONTRIBUTION TO LUCKY PERSONS
An important aspect of today’s proceedings is the opportunity for two lucky persons to receive a monetary contribution from ECHMB towards the initial down payment on the purchase of a house. I am sure you will welcome this gesture. Please be advised that this is simply a public service gesture, intended to alert prospective homeowners of the requirement of a down payment. I have been urged to tell you that it is not part of the policy or modus operandi of ECHMB.
INSPIRING HOME OWNERSHIP
I have been informed that during the course of this week, ECHMB will be involved in disseminating information to the public on home ownership throughout the countries in the EC Dollar Area. And today, the focus will be on prospective home owners in one country. I am glad that the Eastern Caribbean Central Bank has chosen St Lucia for this historic event. This is an initiative that is doing what’s right - for the housing industry, for the St Lucia public, and for home ownership potential throughout the OECS countries. This event is expected to touch the lives of thousands of families in St Lucia, by providing them with information and the inspiration necessary to achieve their dream of home ownership. In addition to the fundamental ideal of home ownership, there are social and economic benefits beyond those that accrue to the occupant of the home.
ECHMB has prepared an elaborate programme with diverse topics, under the theme of home ownership. The discussions are aimed at instilling confidence in persons who are taking the plunge in becoming homeowners. The following have been selected for discussion:
The ultimate goal of these discussions is to protect consumers from borrowing more than they can afford, thereby reducing defaults and foreclosures. But at the same time, consumers will be given insights into the requirements to ensure the structural integrity of the building that they will call "home".
The economy of St Lucia is set on a path to increasing the rate of home ownership, thereby allowing even more hard working families to own a piece of the national asset. The average person, who wishes to build or buy a house, does so by taking out a mortgage. The reason for this is simple. There are only a few people who could afford to buy their own homes outright. However, the word "mortgage" has become wrongly associated with having a substantial debt hanging over one’s head for twenty (20) years or more. The mortgage should more appropriately be described as a means of forced saving. But in most cases it is the aspiration of home ownership that is the motivating force behind the demand for mortgages.
ABILITY TO BORROW
The starting point for demand for mortgages is the ability to borrow. In turn, this depends on credit worthiness and the availability of acceptable securities for lending. But, there are other factors that affect the demand for houses – notably personal income, rate of household formation, personal improvement, demographic factors, and very importantly, government policy.
In the 1999/2000 Budget Address, the government enunciated a clear policy of encouraging a move towards increasing the home ownership ratio, without creating an undue burden on the public treasury. The mortgage interest deduction stands as the cornerstone of our national housing policy. However, as we continue to face shrinking subsidies, the housing industry must find innovative ways to bring down the cost of home ownership.
THE POWER OF KNOWLEDGE
We have often heard it said, "knowledge is power." And in the housing market, knowledge can give lenders the market acumen for lending to underserved sectors of the community, including low and moderate income families. In the case of borrowers, knowledge can knock down the perceived barriers that have discouraged many people from even applying for a mortgage.
REFOCUS ON INVESTMENT IN LAND AND HOUSING
The Home Ownership Day event will be a useful forum for many prospective customers, who are two or three years away from qualifying for a mortgage. Many are further away because they have severely damaged their credit. So many of our people are not fully aware of what the consequences would be for running up their credit. These days with the craziness in the use of credit cards, people have resorted to paying their grocery bills with credit cards, not fully cognisant of the expensive interest charges associated therewith. Anecdotal evidence suggest an increase in the use of credit that have a short term perspective and the use of limited resources to acquire goods which have an in built obsolescence, such as cars. My advice to you is simple: If you wish to invest, then invest in land and housing.
PROVIDING INFORMATION AND KNOWLEDGE
A lack of knowledge of the resources available is a big part of the problem. Many people have no access to information that is relevant and useful. Educating customers through Home Ownership Day is the preferred way of helping to balance the scales. One step in that direction would be for lenders to give consumers more information about what factors cause them to be denied a favourable loan or require them to pay a higher interest rate. It means talking to borrowers on a level they can understand, explaining the mortgage process and what needs to be done to get approved. Part of the job is making the borrowers feel comfortable. We must dismantle the walls between the borrower and lender.
OPENING THE DOOR TO HOME OWNERSHIP
Expanding access to housing and mortgage credit is a central goal of this country’s housing policy. The ECHMB represents an innovative mechanism by which mortgage credit can be provided to commercial banks for lending to prospective homebuyers. But there still appears to be large sections of our communities that are not adequately served. I again challenge the main players in the mortgage industry – notably commercial banks, insurance companies and lawyers, to remove the barriers which currently exist and open the door to home ownership, especially for borrowers who have good credit, but lack sufficient closing funds. By reaching out to the underserved communities, you are not only reinforcing good social policy, you would also be uncovering good business opportunities.
CULTURAL AVERSION TO MORTAGES
Our region has been exposed to the banking sector and the business of lending for a long time. However, there still seems to be a cultural aversion to having a mortgage. For many people, ownership of a home should only be considered through a cash payment. To engage in a mortgage is a signal that the owner has done something wrong, or is in need of money, so he or she has to go to the bank and put his/her house up as collateral. Unfortunately, very few persons could accumulate sufficient savings during their working life, to enable them to make cash payment for a house. This interaction today aims get prospective homeowners beyond that kind of thinking.
In the emerging economic environment, government expects individuals to become less dependent on hand outs, and instead to assume greater control of, and responsibility for their financial destiny. Home Ownership is a sure way of demonstrating financial independence and establishing the central pillar for support in old age.
HOME OWNERSHIP SAVINGS PLAN
Owning a home requires savings. In order to encourage our young people to save money to be used wholly for the acquisition or construction of an owner occupied dwelling house, Government introduced a scheme whereby a taxpayer, who saves under a Registered Home Ownership Programme with a financial institution, is entitled to a deduction from income tax, to a maximum of six thousand dollars. This scheme should be embraced by every young person who enters the job market.
PARTNERSHIP BETWEEN ECHMB AND LOCAL BANKS
I welcome the partnership that ECHMB has formed with the St Lucia Co-operative Bank and National Commercial Bank of St Lucia, specifically for the purpose of opening doors for home ownership to hundreds of underserved St. Lucians. If these arrangements are managed well, then they can make a significant contribution to achieving the dual goal of:
I strongly encourage other commercial banks to consider how best a partnership can be developed with the services of ECHMB to provide lower cost mortgages to customers.
Today's Home Ownership event is a significant marketing opportunity for the commercial banks and other mortgage lenders. Assuming that 25% of the target group were to embark on the project to build or buy a house at an average price of say $250,000.00, this would translate into potential business for primary lenders estimated at $25,000,000.00. By placing only 400 prospective borrowers in touch with lending institutions, this Home Ownership Day event would have generated new employment, created substantial business opportunities for building contractors, primary lenders, and construction material manufacturers.
NEED TO REVIEW INTEREST RATE STRUCTURE
I have heard and seen references of commercial banks raising funds by way of deposits, offering presumably premium interest rates as low as 4% and lending for housing at 11.5%. By simple mathematics, this represents a spread of 7.5% to the lending institutions. This certainly calls into question the interest rate structure applicable in the banking system. I am convinced that there are administrative measures as well as asset restructuring programmes that can be carried out, to reduce the interest rate on mortgages to more affordable levels, for the benefit of consumers.
ONWARD TO THIRTY YEAR MORTGAGES
Reforms to the interest rate structure must be matched by changes in the duration of mortgages. Recently, Barfincor advised the public that they have extended their mortgage repayment term to thirty years up to the age sixty-five years. This is a welcome development. The St Lucia Mortgage and Finance Company, an institution now owned by the National Insurance Scheme, must do likewise, and quickly. The time has come to reduce down payments from the usual 10% to 5%. Perhaps soon we can move to 100% financed mortgages.
PROTECTION TO HOMEOWNERS
This Home Ownership Day event should also serve to build a base for collaboration among homebuilders and contractors. Persons embarking on building their homes should seek counselling before engaging contractors. We hear of so many horror stories by
helpless homeowners. Invariably, disputes with contractors focus
on cost overruns and poor quality construction. Consider this unfortunate experience of a prospective homeowner who lived abroad. The prospective homeowner invested several thousand dollars in a retirement home. Too his horror, the pillars were distinctly crooked. The whole building was compromised. Today, the building is worthless, evidence of an investment gone astray. One wonders whether the building contractor was able to apply some of the simplest construction tools. I am sure the lenders among us today could illustrate even more glaring errors by contractors.
In addition to having to deal with decisions on everything from the type of colour tiles, to bathroom accessories and kitchen appliances, prospective homeowners have to decipher the often complicated financing involved in new home construction. The process can be stressful; primary lenders and building contractors would have fulfilled their social responsibility, to disclose as much information on the transaction and the products available, and the financing arrangements. By so doing, homebuyers don’t have to worry about getting hit with a higher interest rate after the house is completed.
Home Ownership Day will present commercial banks, building contractors, architects and agencies with new business opportunities. The presence of ECHMB as part of the secondary mortgage market infrastructure presents an ideal opportunity for commercial banks to diversify into financing other productive sector activities such as commercial mortgages.
The initiative by ECHMB to build partnership with primary lenders is consistent with this Government’s focus on housing. Home Ownership Day is further manifestation of the leadership role the Bank is playing in the mortgage industry. If we can create a critical mass of homeowners in the urban areas, as well as expand the housing stock in the villages, we can make a serious sustained long term impact on the quality of life of our people.
ECHMB has demonstrated that services can be provided that would turn ordinary persons into better informed customers without blood, sweat and tears. It was salutary to hear some primary lenders and borrowers and journalists re-assert their faith in the work of the secondary market institution and
stressing the need for continuity with this event. I am sure this message will reach other jurisdictions of ECHMB and for this change of attitude, today’s forum is eminently worthwhile.
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