This article will examine the proposed HDC Housing Bonds announced by Finance Minister Imbert in Parliament on Friday, 20 September 2019. The proposal is to borrow $1.0 Billion via bonds in various tenors offering investors tax-free returns of 4.5%. The funds raised are to be used for purchasing HDC homes, which was stated to be of importance in addressing critical financial challenges in that State Agency.
The Finance Minister, Colm Imbert, set out his case –
“…One of the things that has humbugged the housing development effort over the last many years, through all Governments, has been the availability of funds because it has been a challenge for all Governments, I would say over the last 20 or 30 years, to allow persons who occupy HDC houses through the rent-to-own system or through the licence to occupy system. It has been a challenge for all Governments to convert those persons from rent-to-own or licence to occupy into a mortgage situation where the full proceeds for the sale of the house come to the Housing Development Corporation.
The way the system is supposed to work, Madam Speaker, as the Government constructs houses and persons get their mortgage loans through TTMF or otherwise, through the commercial banking sector, then those funds would be the feedstock for the construction of new houses. But unfortunately, over many, many, many years, for all sorts of reasons, it has proven a challenge to get that steady income stream coming in, so that purchasers of houses now would provide the funding for the construction of houses in the future. So, this Government decided that it is necessary to provide the HDC with a steady stream of funds in this way, through the issue of HDC Housing Bonds…” (pg 20)
The glaring issue, notwithstanding the repeated references to affordable housing, is that this entire exercise is geared to promote home ownership. There is no prospect at all of any new affordable rented homes being built with these funds. Over 85% of the applicants on the HDC waiting list cannot qualify for a mortgage to buy a home at any price since they are too poor. Yet we see proposals being advanced to increase home ownership, not one word for how HDC is to increase the supply of rented homes. This is a serious misallocation of efforts and resources, across all administrations, with no tangible sign of any serious proposals to build new homes for the poorest applicants on HDC’s waiting-list.
But beyond the fact that our decision makers are seemingly oblivious to the real plight of our poorest citizens, these bonds deserve our attention as they pose particular risks of which we should all be aware.
As is so often the case, the situation is paradoxical, in that with a State guarantee, these are effectively a sovereign bond which at 4.5% will offer a far higher rate of return than the very low rates being offered by mutual funds and fixed deposits. So, on that basis, one can reasonably expect that this bond will be readily over-subscribed.
The other aspect, which has not yet emerged in the public discussion is that this approach of funding marginal housing (I will not abuse the word ‘affordable’) via bond issues lay at the heart of the great financial crash of 2007/2008. The concentration of risk in an aggressively marketed investment instrument was bad enough, but that was then magnified by the ability of the original bondholders to bundle and then re-sell those to less informed investors. One of the issues Opposition Parliamentarians identified, but were unable to really grasp, was the Finance Minister’s introduction of the notion that those bonds would be transferable. You see?
The HDC’s principal financial challenge is serious one, as shown by the allocation of homes by NHA and HDC in the period 2003 to 2018 in these tenures–
- Rental – permanently rented homes;
- Rent to Own – Homes rented to persons who intend to purchase but are unable to do so due to short-term financial encumbrances. Two-thirds of the rents paid are applied to a deposit when the purchase is realised;
- Licence to Own – Homes rented to persons who are qualified to purchase but are presumably unable to do so due to challenges on the HDC side of the transaction. It is likely that those challenges are the lack of good title as required by lenders. 90% of the rent paid is applied to the purchase price;
- Outright Purchase – Homes which are sold to persons on the waiting list.
|TENURE||Rental||Rent to Own||Licence to Own||Outright Purchase||TOTALS|
So, having built and distributed 15,298 new homes, the NHA/HDC was unable to sell 71% of those homes due to faulty title. No private developer could survive those odds. No doubt the fresh funds raised by these bonds will be used to finance those sales, possibly with the Corporation indemnifying the lenders it partners with against losses arising from bad title.
The HDC’s focus on the PPP approach to provide new homes via developers building and being paid via sales of the completed units will also be affected by those recurring title issues, as per the sidebar.
In my view that, despite the tremendous appetite for solid investments, these HDC bonds are likely to be a risky financial instrument in this market. I will continue this next week.
According to the Parliament’s Joint Select Committee 2015 Report into TTMF –
“…In 2008 we had established what we called an HDC Unit in anticipation of 3500 mortgages from HDC within three years. Three years later we had to disband that Unit because the HDC did not have the title that would afford mortgages…”
— (testimony of TTMF’s then Managing Director, Ms Ingrid Lashley, at pg. 126)