Prime Minister Bruce Golding - File

PRIME MINISTER Bruce Golding has thrown out a plan by the National Housing Trust (NHT) to move from a fixed to adjustable rate mortgage regime, not only denying the agency projected annual revenue of $670 million over the next five years, but also the policy flexibility to respond to changing conditions in the real estate market.

NHT prices its mortgages on a structured rating system, ranging from a low of two per cent per annum to a high of six per cent - the cap is soon to be revised to eight per cent - with the main qualifying criteria being income.

The loan is fixed at the issued rate throughout the life of the mortgage, even if the mortgagor's income level changes.

Interest rate caps

NHT, it appears, considers the system inherently flawed and has been lobbying for that to change.

Its proposal to Golding, who has portfolio responsibility for the Trust, was to revise the system to allow for a half-point adjustment on existing mortgages every three years, up to but not beyond the interest rate cap on new loans, which at this stage would be eight per cent.

Mortgages issued at cap would face no adjustments.

PM's new proposals

To properly police borrowers, the Trust proposed that the adjustment be automatic and that to qualify for a stay, the onus be placed on clients to prove their income status had not changed.

Golding's response to the proposal was 'no' - which dumps $3.35 billion of projected gains by the Trust over the financial years ending March 2009 to March 2013 - but the PM in turn opted to free the agency of $5.4 billion in planned spending on 'social housing'. The latter expense will be shifted to the annual communal fund for lawmakers, the Com-munity Development Fund.

Rescue strategy

But Golding has accepted other proposals laid out by the Trust in its five-year 'Financial Viability Model' report of February 2008.

That report is crafted as a rescue strategy and is predicated on forecasts that the housing agency could go broke in five years, wiping out its $14.7 billion of accumulated surplus, if new revenue generating measures and efficiency programmes (see insert) were not implemented to finance the special projects that government taps the agency to fund.

Last fiscal year, the period ending March 2008, NHT made a projected net loss of $421 million, due to lower mortgage loan collections, smaller interest income on its investment portfolio and higher operating expenses.

But going forward, the agency is projecting operating gains of $700 million in this fiscal year, and steady growth thereafter to $4.4 billion by 2013, and that net surplus would grow from $403 million to $2.65 billion.

Within the same period, NHT projects that revenues will build from $5.8 billion this year to $10.9 billion.

Golding in his presentation to the House of Representatives on Wednesday, was critical of how NHT's interest rate policy has been managed, saying the adjustments have served to erode earnings for the trust.

"Between 2000 and 2008, the average return on mortgages has been cut in half from 8.2 per cent in 2000 to 4.2 per cent in 2007. But the cost of funds to the NHT is 4.2 per cent," said the PM.

"There is no properly run lending institution that can lend money at the same rate that it costs to get the money to lend. It will not be able to meet its operational expenses. Its reserves will eventually be wiped out."

NHT's accumulated fund grew by more than five billion to $60.1 billion at yearend March, and is projected to reach $69.8 billion in the current fiscal year.

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