Banks call on borrowers in difficulty to engage early on
Since the financial crisis, mortgage defaults have been a growing issue for borrowers and lenders. Exact data is difficult to come by but demand notices published by banks in the Cayman Islands Gazettes show that more people are finding it harder to make their mortgage payments.
Banks are calling on their customers in these situations to contact them as early as possible to find a solution, for example, remortgaging the property or altering the loan terms.
In 2008 and 2009, the government gazettes featured only nine and seven demand notices for a total loan amount of $1.1 million and $1.4 million, respectively. In 2010, banks issued 11 demand notices for a total outstanding debt of $2.3 million.
As unemployment among Caymanians increased from 6 to 10 percent and the number of potential tenants declined with work permit numbers falling from a high of more than 26,000 in 2008 to fewer than 19,000 in 2011, these debt notice numbers grew significantly in the past three years, when 20, 25 and 24 mortgage payment defaults were listed.
Banks saw the highest outstanding total loan amount affected by non-payments in 2011 with $7.7 million. However, this figure included a single loan of $3.97 million that skewed the statistic. In 2013, the situation remained unchanged from a year earlier when loans affected by borrowers missing their monthly mortgage payments totaled $4.7 million and $4.8 million, respectively.
The loan defaults were spread evenly, affecting all of Cayman’s retail banks and covering all of the islands’ districts, including West Bay, George Town, South Sound, Savannah, Bodden Town, North Side, Rum Point and Cayman Brac.
In an advertisement sponsored by seven lenders, the Cayman Islands Bankers Association in December called on borrowers, who find it difficult making their loan, mortgage or credit card payments, to engage as early as possible with their bank.
The banks’ customer relations professionals will advise and try to assist in developing a strategy to manage the borrower’s financial commitments, the association said. CIBA also tried to alleviate any concerns that borrowers might have that such a dialogue would not be in their favor.
“Be assured that your lending institution is committed to working with you to find a realistic solution in servicing your debt obligations,” the advertisement said.
Cecil Chan-A-Sue, chief operating officer at CIBA, said the issue of problem loans and mortgages has stabilized somewhat, albeit at a higher level, confirming the statistics based on debt notices in the Gazettes.
Banks are recognizing the reality of the economic situation, he said. “People are experiencing difficulties in making their payments.”
In these cases, borrowers have to get in contact with their financial institution at an early stage, Mr. Chan-A-Sue urged. “These problems compound themselves when you wait. Not dealing with it is not going to rectify it.”
Financial institutions can only make an informed decision, based on the facts presented to them if customers are as open as possible about their financial situation, he said. Banks also want to make it clear that it is not their first reaction to foreclose on a property. “They want borrowers to approach them and try to work out a solution,” Mr. Chan-A-Sue said.
Under certain circumstances, it may be possible to renegotiate loan terms. Some banks may, for instance, ask the customer to solely make interest payments and no principal repayments for a short interim period, before a long-term solution is found.
While there can be no guarantee that such a solution is available, missing monthly payments and not engaging with the bank, leaves the lender with the only option of taking action, he said.
However, it is rarely in the interest of the bank to foreclose on a property. Not only is repossession a lengthy process, it will also take an average of 12 months for a property to be sold, according to broker James Bovell, owner at RE/MAX.
“And depending on the market, the bank may not even realize the actual amount of the outstanding loan,” Mr. Chan-A-Sue noted.
Mr. Bovell said in a Caymanian Compass article on forced sales in 2012 that the frequency of foreclosure and forced sales started to increase in 2010 and there has been a steady flow of bank repossessions since.
They predominantly affect the residential real estate market because commercial sales are subject to different terms. For example, a higher level of equity is needed to purchase commercial real estate than to buy a residential property. As a result, monthly repayments are a larger financial burden for residential property owners. They are also more susceptible to a crisis.
The financial crisis in 2008 has hit the rental property market hard. Not only did the number of work permit holders decline considerably, leaving many properties empty, but rental prices dropped in response to the diminishing demand, according to the Economics and Statistics Office’s consumer price index.
*This article was amended from the original to reflect that a court order
is no longer required for a lender to initiate the foreclosure process.