Jamaica Homes Quarterly Mortgage & Housing Finance Review — Q3 2002

Publication date: 5 October 2002 | Covering: July – September 2002

Quarterly Briefing

• WorldCom bankruptcy: July 21; largest US bankruptcy in history at time; $107bn assets; $11bn accounting fraud; corporate scandal wave deepens market distrust
• Sarbanes-Oxley: July 30 enacted; CEO/CFO certification of financials; auditor independence; PCAOB created; sweeping corporate governance reform
• Bear market deepens: S&P 500 down 40%+ from peak; third year of decline; NASDAQ off 75%; investor confidence severely impaired; pension funds under pressure
• Fed holds: 1.75%; economic recovery uncertain; deflation risk emerging; Fed watching; rate cuts possible in Q4
• Corporate scandals: Enron, WorldCom, Tyco, Adelphia, Global Crossing; widespread accounting fraud; Arthur Andersen convicted Jun 15; auditing profession crisis
• Iraq debate: Congress authorises force Oct 2 (FRESH 3 days); UN inspections demanded; Bush addresses UN Sep 12; war debate dominates
• Afghanistan: Karzai government established; reconstruction; Al-Qaeda dispersed but not eliminated; Bali bombing Oct 12 (FRESH 7 days)
• Jamaica: Tight monetary conditions; high interest rates; NHT subsidised lending sustaining housing market activity

WorldCom; Corporate Scandal Wave; Sarbanes-Oxley

The third quarter of 2002 was dominated by the escalating corporate scandal crisis that had begun with Enron’s collapse in late 2001 and spread through American boardrooms. WorldCom’s admission on 25 June — just before the quarter began — of an $11 billion accounting fraud, followed by its 21 July bankruptcy filing with $107 billion in assets, made it the largest corporate bankruptcy in US history at that time. Tyco International, Adelphia Communications, Global Crossing, Qwest, and others added to the roll call of companies facing fraud investigations or restatements. The Arthur Andersen accounting firm, Enron’s auditor, was convicted of obstruction of justice on 15 June, effectively ending its existence as one of the Big Five accounting firms. The cumulative effect was a profound crisis of confidence in US financial reporting, corporate governance, and professional oversight. Congress responded with remarkable speed by passing the Sarbanes-Oxley Act, signed by President Bush on 30 July: requiring CEOs and CFOs to personally certify financial statements, creating the Public Company Accounting Oversight Board to regulate auditors, prohibiting certain auditor-client relationships, and dramatically increasing criminal penalties for securities fraud. The bear market deepened through the quarter — the S&P 500 had fallen over 40% from its March 2000 peak, and the NASDAQ was down approximately 75%, destroying trillions of dollars in household wealth and severely impairing pension and retirement savings.

Fed Holds; Deflation Fears; Housing Resilience

The Federal Reserve held the federal funds rate at 1.75% through the quarter. With the equity market bear deepening and corporate investment collapsing in the scandal environment, deflation risk was beginning to enter Fed commentary. The one area of notable resilience in the US economy was housing: ultra-low mortgage rates — 30-year fixed mortgages around 6% — were driving record refinancing activity and sustaining homebuyer demand even as equity markets fell. House prices continued to rise nationally, creating a striking divergence between the depressed equity market and the buoyant housing market. The Iraq war debate added geopolitical uncertainty to the economic outlook: President Bush’s speech to the United Nations on 12 September, the Congressional authorisation for use of military force against Iraq on 2 October (just days before this publication), and the return of UN weapons inspectors created an overhang of uncertainty about oil prices and business confidence.

Jamaica: High Rates; NHT; Debt Burden

Jamaica’s economy continued to navigate the legacy of its 1990s financial sector crisis. The approximately 130% debt-to-GDP ratio generated interest payments that absorbed a large portion of government revenue, constraining fiscal space and forcing continued tight monetary conditions. The Bank of Jamaica maintained high domestic interest rates to support the Jamaican dollar and control inflation, keeping commercial mortgage rates significantly above international benchmarks. In this environment, the NHT remained the dominant affordable housing finance mechanism, offering subsidised loans at 0%, 2%, and 4% on individual loans up to J$6.5 million, or up to J$13 million for two-applicant borrowers. Private sector commercial mortgage lending was accessible primarily to higher-income borrowers able to service loans at prevailing commercial rates.

Looking Ahead to Q4 2002

The Iraq military build-up and Congressional authorisation suggest a potential military confrontation in late 2002 or early 2003. Equity markets may be approaching a bear market low — valuations are significantly cheaper than at the 2000 peak, but sentiment remains deeply negative. A Fed rate cut in Q4 appears increasingly likely given deflation risk and economic weakness. For Jamaica, fiscal consolidation and debt management remain the dominant domestic policy priorities heading into 2003.

Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.

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