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A middle-class syndrome: Is homeownership a possibility?
Family No 1: John and Mary have a baby on the way. They currently rent an apartment in western Trinidad for close to $4,000 a month. They have been living there for the past two years. They have been married for 4, but have been together for closer to 10. Both are educated professionals in their early 30s with a combined montly income of above $20,000, have good credit and a track record of repaying their loans. But Mary says it seems this is not enough to qualify for financing for a home of their own. Their first foray into the world of mortgages was an eye-opener. The inital institution they approached would only give them only $400,000, an amount that would not purchase the type of house John and Mary would want to start a family.
Family No 2: Sarah and Mitchell, also in their 30s, are on the waiting list at the Housing Development Corporation (HDC). They have been there for several years now, hoping that they would be one of the lucky few chosen to receive the coveted keys to a house or an apartment. Their current situation makes their need all the more desperate. They lived at a house belonging to Mitchell’s parents but left when it was revealed that there were issues with ownership of the property. They now stay at one of Mitchell’s aunts, helping out by paying a rent of $2,500. But Mitchell says the situation is untenable since the money represents a sizeable chunk of their combined $10,000 a month income and there is little left over for saving towards the eventual purchase of a home. To compound matters, Michael and Sarah know almost nothing about real estate or mortgage financing. Mitchell says he is putting aside some money and when the time comes, he’ll see “what he can get”, but he has no specific plan.
Having no specific plan is not a good strategy for approaching home ownership. Buying a home is one of the most significant purchasing decisions anyone can make in his or her life. It stands to reason then, that those embarking on the journey should be prepared for the terrain. But interestingly enough, they often are not. Visions of that front lawn and white picket fence often dissipate in the sometimes overwhelming reality of finding that balance between the house of choice and affordability. Then, there is the process of qualifying for the mortgage. What are the documents required ? What are the options available for finance ? Is it harder for some people than others to qualify for a mortgage or to find the property of their dreams? It may be.
John, Mary, Sarah and Mitchell, represent a tiny portion of an entire swath of people, silent but emerging, for whom home ownership is becoming increasingly out of reach. Earning what would be considered middle incomes, their combined incomes prevent them from accessing housing schemes targeted to lower income buyers. But it also bars them from acquiring homes at the other end of the scale, where they often cannot meet even the downpayment requirement. They are called the “middle” people.
HDC’s Jearlean John:
Quoting from the Labour Force Report of 2008, Jearlean John, managing director of the Housing Development Corporation, says that the “middle” earn between $8,000 and $15,000 make up as much as 20 per cent of the those applying for HDC housing. She says this roughly correlates with their presence in the national population.
Ingrid Lashley: Ingrid Lashley, chief executive officer of the T&T Mortgage Finance elaborates on the group profile based on her experience. “We have the middle income, we have the middle class and we have a new term called the working middle class. Middle income would be those in the $10,000 to $22, 000 income bracket. It is the young single professional, it is a middle manager in the government service. It is an entrepreneur with a start-up company of about three years. They are people who would generally qualify for, or be interested in, property valued somewhere between $800, 000 and $1.2 million. The issue, though, for the middle income earner is that on their own, they cannot afford the repayment on the $1.2 million property.”
Mary agrees. “The price of homes is steep. Especially when you are accustomed to living in a certain part of the country. You have to think about moving to Arima, moving to the deep south. I grew up in Diego Martin. I would like to have a house, with a yard, not an apartment. A house with a piece of land is very expensive.”
The situation is taking its toll on the young professionals. Mary says “I feel frustrated. It has made me envious of people who own homes. I shouldn’t have to be walking around the place bitter and envious. I should be able to put the baby in a house. And it’s not that we can’t afford to. There is nobody saying, look at these two wonderfully qualified young people. Look at them, we could lock them into a long-term loan agreement. They are perfect candidates.” The system doesn’t work like that. If you think of getting a mortgage as a long distance race, you’ll realise the applicant has to be fit, armed with their information and ready for the long haul. And as John and Mary are coming to realise, this race isn’t always for the swiftest. Many assume that young professionals like these are a virtual shoo-in for any type of credit arrangement because of their income level. But a mortgage is different in the sense that it is typically larger than the average consumer loan and has a longer life, extending to between 25 and 30 years, in most cases. The house stands as its own collateral. Which means that if the mortgagee defaults, the lending institution can take it away. But then it also will have the responsibility of trying to recoup the loss, which may be difficult depending on market conditions.
TBLS’s Leslie Nelson: Leslie Nelson, chief executive officer at the Trinidad Building and Loan Society, recalls the economic turbulence of the 1980s. “People were essentially taking their keys back to their mortgage companies and going to Piarco and jumping on a plane and going.” Learning lessons from the period, lending institutions want potential homeowners to be invested in their property. This usually means a downpayment on the cost of the home of at least 10 per cent. The home John and Mary want is priced at $1.6 million. Ten per cent of that is $160,000. They don’t have anywhere near this amount and don’t see themselves accumulating it anytime soon. They have been trying to save it, but Mary says the expense of day-to-day living keep getting in the way.
Lashley says the problem here is not so much that John and Mary do not qualify for mortgage financing. The TTMF head says it is more a matter of them not being able to find properties they want and that they can afford. She says the situation is intensified by private sector developers who have not seen the middle as an attractive segment for which to build houses, a point on which the the HDC managing director agrees. Taking a guess as to why the private sector has largely ignored the middle, John says, “when you are in the private sector, you don’t consider the social good. You are in business to maximise profits. The HDC’s mandate is to build social housing, where we will give you a discount.The private sector will not do that.” Mary thinks this is a fine and deceptive line to draw across the issue in laying the majority of the blame on developers. “I think there are challenges on that side as well. The mortgage people can’t all just sit back and say it is all about the property. They make it difficult as well.”
All of the financial institutions the SBG spoke to have similar credit requirements for obtaining a mortgage (see table). But Mary thinks the real problem starts because none of these lending institutions are actually competing with each other for the public’s business. Comparing T&T to the US, she says, “Banks actually fight using incentives to get people to take mortgages with them. Really and truly, a mortgage is a product that the bank is selling. It is not a favour they are doing. You have a choice as you do with milk in the grocery. Here, all the mortgage requirements are the same. There is not one person who is competing. Everybody requires a downpayment of ten per cent. Everybody wants you to bring in a job letter. Everybody requires you to take a mortgage for 30 years. There’s nobody trying to compete, so you really have no choice.” She also believes that the lending institutions do not make their loans as accessible as their advertising suggests.
“We went to the bank the other day (bank identified). They had some kind of seminar thing. They offered nothing, it was a kind of meet and greet, a mortgage expo kind of thing and they basically telling you about all the things you already know you need to have. There are no incentives, no help. There was a lawyer there, they had a mortgage specialist there, but they are telling you the same things written in the brochure. So there is very little help and navigating the mortgage world is difficult if you have never been in it before. “They should have somebody walk you through the process. It shouldn’t be a sit-down conversation on one day. I should be able to call somebody on a phone, someone you don’t have to access through a PBX. I find alot of the processes at the financial institutions extremely burdensome. You are calling and you can’t get through. And the banks always make it seem that they are happy to have your business. ‘Come in and get a loan. It is as easy as 1, 2,3’. But it is not.”
But, according to the banks, comparing the US to the T&T market is a case of comparing apples to oranges. Because of the relatively homogenous nature of the local market, there is little deviation in what financial insitutions need to ask for. Also, they say they are legally required by the Central Bank to ask for proof of income and address. This is why they ask for job letters for example. Clearance from WASA often has the potential homeowner scratching their head. This is required to ensure that there are no encumberances on the property. One mortgage officer illustrated, “imagine you want to buy a property from someone, only to realise that they owe WASA thousands of dollars. It would make you think twice, wouldn’t it.” Mitchell is yet to get to the stage where he has found a property he likes and an institution to assist, but already he’s frustrated. He and his wife do not have the advantage of a steady credit and employment history, like John and Mary. So they have chiefly relied on the HDC. “It’s just one big hassle after the other. They keep sending letters asking you to update your information, current job, salary, but nothing on when we’ll be getting the house. Even people with houses have problems. Some friends of ours recently got keys to a place. They haven’t moved in yet because of the condition of the house,” said Mitchell.
The HDC head is aware of the issues. The long wait in particular. John says she goes to work for 5:00 am and meets people waiting to plead their case for a home. She believes that the situation is reflective of a level of despair people feel regarding housing. “Even middle income people are living in poor conditions because rent is so high. A middle income rent is between $3,000 and $6,000 and that is a sizeable chunk of people’s salaries...As people become more desperate in terms of the private housing market, they turn to the HDC.”When asked if the HDC was willing to fill the gap that private developers had left in the middle, John indicated that she believed everyone had a right to a home. The state agency has faced criticism in the past for moving away from its mandate of providing homes for lower income families and devoting resources to developments like Fedelis Heights in St Augustine, which features subsidised units of between $750,000 to $900, 000. On the open market, one of these homes would cross $1 million. John was hesistant to say this represented a shift in the HDC’s policy. “You can’t say you are shifting and then the opportunity cost is lower income people, who remain vulnerable. As tax paying citizens, all of us, we are all entitled. Because that is really the requirement. You are a citizen of T&T. You are over 21. You don’t own any previous land or house. My thing is you cannot close out a group who also cannot afford housing on the open market.”
Lashley also sees these developments as alternatives to the traditional housing market. The TTMF CEO believes that as time passes Fedelis Heights will become the model for more HDC housing like it, catering to those of the middle class and those of middle income. Referring to the 148,000 backlog of applications in the HDC’s database, John acknowledges that as a country we need to find more creative solutions to the housing problem. She suggests the adoption of a system used in Singapore, where money is deducted from citizens’ salaries from the time they start working and put toward a house, which they will be able to access at a future date. Lashley also had some suggestions for the young couples in their search for affordable properties. These include sourcing abandoned houses and “fixer uppers.” She also says people should begin making a psychological shift away from Port-of-Spain as ‘middle’ people all too often want to focus on the East/West corridor, where transportation is easier, accessiblity to the office is easier. She notes that property becomes cheaper the further away it is from city centres and sees potential homeowners in the middle segment gravitating towards central Trinidad.
“Cunupia, Chaguanas, even parts of San Fernando, Marabella, I think those along the highway are the new hotspots, as you would call it.” She thinks improvements in transport and infrastructure should make this more feasible. Lashley also described the “granny suites” concept, one which she believes will solve the problem of young professionals and couples needing to find a house outright. Here, parents and adult children share the home. “We have come to a point where we want to be so independent that we disregard our base. We have examples of people who are traditional mortagagers. Their parents have been traditional mortgagers with us and they have now come to the place where the younger people take over the mortgage, take over the property and adjust the living place, so that the parents have their living space and they have their family and they have their own private space. “It provides for the older people having somebody to look for them as they become older. It provides support for the younger people so they have built in baby-sitting services and we get back to the place where our children have the nurturing of the wider family community. The living circumstances are such that it is an arrangement that can work to the benefit of all.”
Landlords and tenants could also come to an agreement with each other, says Lashely. A landlord who no longer wants the responsibility of a property could give the tenant the first option for purchase. A portion of the rent would go towards buying the house and after a pre-determined period when the initial purchase price is reduced, the tenant could then apply for a mortgage to finance the remainder owed to the landlord.
The TTMF head also sees rent-to-own arrangements becoming more popular. This is where rent for a property is, over time, converted to a mortgage. Asked if they ever explored any of the alternatives put forward, John, Mary, Mitchell and Sarah admitted they had not. In most of the cases they had not even realised these were options. Lack of knowledge about the ins and outs of the market, how to find accessible properties and non-traditional ways to finance them is hurting the middle sector. Mitchell, for example, did not know that he would still have to get a mortgage for a public sector house. Leslie Nelson, of the Trindad Building and Loan Society, says this is typical since in his experience, as many of 50 per cent of the people who come in to the institution do not know what are the requirements for obtaining a mortgage.
“We have individuals who would walk into us and say that they want a house and they see a house that they like and they want to purchase the house, full stop. Most of the time, they have no idea that is what is required, for example, attendent fees and documents” But the problems of the middle are not insurmountable. Lashley advises people to start planning for a house purchase early. “I always recommend to people graduating from school that they establish a strategic life plan. With that in mind, I say assume I leave school in 2014 and want to buy a house by 2020. So I start looking around in 2014, what kind of house am I interested in. I have to think now, if I have to pay down on a million-dollar home in 2020, my savings target over the next five years is $100,000, based on today’s circumstances.”
And there are advantages to getting that headstart. Nelson says, “conservatively, if you were to purchase a house with a timeframe of 35 years (to repay), the installment at 25 years could almost be 50 per cent less than it would be at age 45.” Several institutions feature packages specifically geared towards helping potential first time owners save for their downpayment. (See table) While credit criteria remains standard across the board, there is a level of flexibility in repayment terms at the different lending institutions. What remains is—for people like John, Mary, Mitchell, Sarah and all of those who find themselves in the middle—to find the solutions that work best for them.
Mortgage Requirements: Ingrid Lashely, CEO of the Trinidad and Tobago Mortgage Finance says it is a common misconception that mortgage criteria are more relaxed at some institutions than others. She says even though there will be a level of flexibility in repayment terms and interest rates, the fact is criteria are standard across the industry and fall under three general categories:
Stage 1: At this preliminary stage, you assess how much house you can afford and how you can pay it off. The Internet has allowed the potential mortgagee to now use mortgage calculators on most institutions’ Web sites. There, they can work out what they qualify for and what their monthly loan repayment will be based on their current circumstances. Some institutions still invite potential homeowners to come in and have a discussion at this stage.
Many institutions, at this point, will indicate whether a candidate is “pre-qualified” or “pre-approved” for a mortgage. At this point, a more thorough check is made into the circumstances of the potential morgagee, inclusive of a credit/loan/debt history. Here are the other general requirements:
• An agreement of sale for the property
• A letter of employment or certified statement of employment/ bank records for a specific period of time if self employed
• Identification (usually two forms)
• Proof of Address (e.g. utility bill, bank statements)
• Evidence of savings
• A professional valuation of the property to be purchased
• A deed for the property
• A WASA clearance certificate
• A record of taxes paid on the property
• Clearance to build from Town and Country/Regional Corporation (if constructing a home)
• Other proof that the property is free from encumberances as required
• Downpayment of ten per cent of the value of the property
These criteria may differ slightly depending on whether one is purchasing a home, acquiring land or constructing a home. There are also several fees associated with this stage that the potential mortgagee must be aware of, such as legal fees and those paid to the valuator. The property buyer must also be prepared to purchase mortgage indemnity insurance to cover mortgage payments in the event something happens to them.
Stage 3: After receiving the required documents and making the necessary checks the potential mortgagee is called in to sign a letter of offer. Funds are normally disbursed at this point.
RULES AND OPTIONS
Many financial institutions offfer special programmes to customers/members that may make it easier to purchase a home. Leslie Nelson, CEO of the Trinidad and Tobago Building and Loan Association (TBLA), notes that stamp duties, legal fees and the valuator’s report could represent as much as 10-25 per cent of the cost of purchasing a house. He says as most people are not prepared for these costs, the TBLA created its Downpayment Savings Programmes (DSP) Under the DSP, association members accumulate the necessary funds in an interest bearing account at competitive rates. Most credit unions surveyed also had special loan packages for first time homeowners, where members were allowed to borrow money for their downpayment.
Eastern Credit Union, one of the country’s largest unions, has the “Homeward Bound Loan.” Here, members planning to buy a home in within a particular period of time can access up to $150,000 dollars toward their downpayment.