In analysing the Varinstall mortgage product introduced to the local market by the Workers' Bank in the late 1970s, the Central Bank, in its 2007 Public Education Pamphlet, titled "The Residential Mortgage Market in T&T," states: "The onset of recessionary conditions in the economy in the latter half of the 1980s severely affected property values as well as personal incomes and created unusual stresses for the product."
The Varinstall Mortgage, which started with a low initial mortgage instalment, was based on the assumption that the incomes and property values of homeowners would continue to rise.
It was felt that if the incomes of homeowners rose over time then he, she or they would have been able to pay the higher instalments of both principal and interest, which kicked in after a few years.
The 1980s recession, which was caused by a collapse in oil prices similar to today, invalidated many of the assumptions that were made 30 years ago.
The recession then meant that the Workers' Bank "eventually faced severe problems of loan default," leading to about 90 per cent of their entire mortgage portfolio being in arrears in April 1989 when the institution was in "technical insolvency," according to the Central Bank report.
The story of people locking up their homes and handing the keys to their bankers may be apocryphal, but there is probably an element of truth to it.
The contention here is that if the middle-income families are not very careful, the hollowing out of the residential housing market that occurred in the 1980s–with such devastating social, economic and financial impacts–can very well occur again.
That assessment is based on a December 2011 paper entitled "Housing Finance Policy under Dutch Disease Pressure: the mortgage market in T&T."
One of the conclusions of the Inter-American Development Bank paper, which is co-authored by deputy Central Bank Governor Sandra Sookram, is that "the price of housing in T&T is very highly correlated with the international price of oil."
By that I think the authors mean that if a recession lasts long enough, it leads to retrenchment, static or declining salaries and reduced discretionary income caused by higher taxes and a fall in transfers and subsidies.
All of that may make it more difficult for middle-income families to keep up with their mortgage payments.
If the ownership of homes by middle-income households is threatened by the recession, is there anyway those families can respond?
Here are some suggestions:
1) Have a discussion with your mortgage lender about whether you are paying a higher instalment than you should. Some of lenders will not lower your mortgage interest rate unless you specifically ask them;
2) Find out if your mortgage is rated under the Mortgage Market Reference Rate, which is the interest rate benchmark against which mortgages are to be priced and repriced. That rate, which was supposed to increase the disclosure and transparency of the mortgage market, was introduced in September 2011. It was supposed to include all new and existing residential real estate, but clearly it does not;
3) If you have a lump sum set aside to buttress your retirement savings, give serious thought to making a downpayment on your mortgage. This is especially useful given the fact that mortgage rates are likely to increase in the near future.