Jamaica Mortgage Bank (JMB) is targeting the big three mortgage sellers for the roll-out of its amended indemnity insurance product, which is currently awaiting parliamentary approval, says General Manager Patrick Thelwell.
JMB plans to underwrite a greater portion of mortgages in the total market, but is currently locked out of about 95 per cent of the market controlled by the top three lenders, according to Thelwell.
Through the new Mortgage Indemnity Insurance plan, or MII-2, the state-owned bank will insure 97 per cent of mortgage loans. At level of coverage, Thelwell said, JMB is hoping to convince National Housing Trust, Jamaica National Building Society, and Victoria Mutual Building Society to subscribe to MII.
The big three are currently doing some amount of self-insuring, said the JMB head.
"Coverage of 97 per cent will attract them, eliminating credit risk for them. We are hoping this will have a transforming effect on the market," he said.
Last year, about J$30 billion of new mortgages were written across the sector, he adds. The Economic and Social Survey of Jamaica actually estimates mortgages issued in 2012 at J$28.7 billion, with state-owned NHT alone accounting for over 67 per cent (see inset).
"The big three account for 90-95 per cent of the mortgage market. We are advising the Government to improve the attractiveness of the MII for them," said Thelwell.
"If we get one of the big three on board, the others are likely to follow," he said.
The purpose of MII is to protect the lender against loss in the event of default by the mortgagor.
The insurance product's scope is determined by the Mortgage Insurance Act and regulations of 1960. It is expected to encourage home ownership by enabling approved lenders to lend a higher percentage of the appraised value/property price than may normally be considered by the issuers of mortgages.
Jamaica's mortgage market is currently estimated at more than J$210 billion, including J$113 billion controlled by the NHT (see inset).
The insurable portion of a mortgage is now capped at 90 per cent. Once the ceiling is raised to 97 per cent, Thelwell said, MII will more likely attract the big three.
JMB currently insures up to 22.33 per cent of mortgages. Its clients currently assume the rest of the risk, using the mortgaged property as collateral.
"We can do whole mortgages, but most institutions take the risk up to 662/3," Thelwell said. Some-times the lender assumes as much as the 80 per cent of the risk, he adds.
Once the ceiling for insurable risk is raised, JMB estimates that it will underwrite as much as 29.33 per cent of a mortgage.
JMB charges a premium of seven per cent of the sum insured under MII. Thelwell said the premium is a one-off payment, which is generally treated as a pass-through charge and can be built into mortgage loans by the lender.
The JMB's only MII clients so far are Sagicor Jamaica, FirstCaribbean International Building Society, and First Heritage Cooperative Credit Union.
"Others have expressed interest," Thelwell said."The essence of mortgage-indemnity insurance is to deal with mortgage insurance. Many years ago, institutions were not willing to lend more than 662/3 per cent of the value of a house. So the Government introduced MII of up to 90 per cent. But, as the price of housing increased, the 10 per cent remaining for the buyer to pay has become more burdensome," said the mortgage banker.
"Now, we are trying to facilitate those who cannot come up with the deposit."
Thelwell adds that while the product protects the lender, its wider intent is to free up credit for lending.
"We want to facilitate those people who can afford the mortgage. We are not trying to affect the underwriting quality. We are simply dealing with the matter of the deposit," Thelwell said.
"The aim is to get young professionals into a house earlier. The earlier they do this, the lower the price and lower the mortgages over time," the general manager said.
The MII fund, which is administered on behalf of the Government of Jamaica by the JMB, stood at J$1.1 billion in March 2013. That was down 11 per cent down, from J$1.2 billion the previous year.
The fund, which is invested in government securities, lost value in the wake of the National Debt Exchange in February when the GOJ swapped out expensive debt for cheaper bonds with longer maturity dates.
Thelwell projects that if the mortgage bank could insure 20 per cent of new mortgages annually, the MII fund could see premium growth of J$420 million annually from its seven per cent premium fee.
"The MII funds grow from premiums and investment in government securities," said Thelwell.
"There is the possibility of insuring about J$6 billion annually which is calculated as 20 per cent of new loans generated annually."
There are constraints on the fund — JMB does not insure properties above J$15 million, and the mortgage must also be of a certain quality, he adds.
The MII Fund has not had a claim since 2005, as very often the value of the asset itself is more than enough to recover any losses made on mortgage loans, according to the bank's legal officer Donna Samuels-Stone.
"To date, we have insured about 23,000 homes," said Samuels-Stone.
"Claims will be made only after losses are posted following sale. The asset is often sufficient to pay off the loan and there is no claim. At default stage, the property is often worth much more than the mortgage amount," she said.
JMB secures its income from construction financing. Its mandate also includes the operation of a secondary mortgage market and providing mortgage insurance.
Thelwell notes that there is much in MII to benefit mortgagors themselves, many of whom are at pains to save a 10 per cent deposit.
Even the upfront costs such as transfer tax and stamp duty can now be borrowed as well, with an improved MII and deposit loans schemes, which the JMB also plans to offer.
"You may still be required to find 10 per cent of the purchase price; the MII facilities bridge financing to cover these costs," adds Samuels-Stone.
Once the law is amended to allow for 97 per cent financing of home purchase, it will lower the upfront cash needed by the buyer. But JMB also plans to lend them those funds as well.
"We are also looking at offering a deposit loan, and we are also encouraging other institutions to put that in place as well," Thelwell said.
Organisation - Volume Value
NHT7 - 205 J$19.4b
Building Societies - 1,281 J$7.4b
Life Insurance - 43 J$254m
Credit Unions- 3,155 J$1.7b
Total - 11,684 J$28.7b
Source: PIOJ Economic and Social Survey 2012
NHTJ - $113b
JNBS - J$46b
VMBS - J$27b
Scotia - J$15b
Source: NHT and Bank of Jamaica