Jamaica Homes Quarterly Mortgage & Housing Finance Review — Q4 2002

Publication date: 5 January 2003 | Covering: October – December 2002

Quarterly Briefing

• Fed cuts 50bp: November 6 surprise 50bp reduction to 1.25%; deflation risk; economic weakness; largest single cut in 20 years; housing further stimulated
• Republicans gain Senate: November 5 US midterms; Bush’s Republicans regain Senate 51–48; unusual midterm gain for incumbent president; Iraq mandate strengthened
• Iraq UNSCR 1441: November 8 UN Security Council passes unanimously; “serious consequences” for non-compliance; inspectors return; military build-up continues
• DC sniper: October; John Allen Muhammad and Lee Boyd Malvo; 10 killed over three weeks; Washington area paralysed; psychological terrorism
• Market lows: S&P 500 hits bear market low of 776 in October 2002; down 49% from March 2000 peak; NASDAQ off 78% from peak; irrational depression replacing irrational exuberance
• Sarbanes-Oxley: July 30 enacted; corporate governance reform post-Enron/WorldCom; CEO certification of accounts; audit independence
• Venezuela: Chavez faces general strike; oil sector turmoil; December 2002 strike begins; global oil supply concern
• Jamaica: High interest rates; economy managing post-financial crisis debt burden; NHT critical for housing finance

Fed’s Surprise 50bp Cut; Market Lows; Iraq Build-Up

The fourth quarter of 2002 opened with equity markets approaching their bear market nadir. The S&P 500 reached its lowest point of the post-dotcom bear market in October at approximately 776 — representing a 49% decline from the March 2000 peak — and the NASDAQ Composite had fallen more than 78% from its peak. The corporate scandal environment of 2002 — Enron, WorldCom, Tyco, Global Crossing, and others — had profoundly shaken investor confidence in US corporate governance and financial reporting. The Sarbanes-Oxley Act, signed by President Bush in July, had begun the regulatory response: requiring CEO and CFO certification of financial statements, strengthening auditor independence, creating the Public Company Accounting Oversight Board, and significantly increasing penalties for fraud. On 6 November, the Federal Reserve surprised markets with a 50 basis point rate cut — the largest single cut in two decades — bringing the federal funds rate to 1.25%. The FOMC cited “growing caution by businesses and households” and the risk that economic weakness would lead to an unwelcome further disinflation. The cut had enormous implications for the mortgage market: 30-year fixed rates, already low by historical standards, fell further, making homeownership more accessible and stimulating the refinancing wave that was underpinning house price appreciation.

DC Sniper; Iraq Inspections; Midterms

The DC sniper attacks of October 2002 — a three-week campaign by John Allen Muhammad and Lee Boyd Malvo that killed ten people and injured three in the Washington DC metropolitan area — paralysed the region and exemplified the psychological terrorism that random targeting could inflict. The shooters were captured on 24 October. The US midterm elections of 5 November produced an unusual outcome: instead of the normal pattern of the incumbent president’s party losing seats in Congress, Republicans gained two Senate seats and eight House seats, returning to Senate majority and strengthening their House majority. The gains were attributed to Bush’s high post-9/11 approval ratings and effective nationalization of the election around security and terrorism themes. The Republican Senate gains simplified the administration’s path to authorising military action against Iraq. In the United Nations, Security Council Resolution 1441, passed unanimously on 8 November, returned weapons inspectors to Iraq under strengthened terms and warned of “serious consequences” for non-compliance — language that the US and UK interpreted as pre-authorising force while France, Russia, and China did not.

Jamaica: Financial Sector Restructuring; Mortgage Conditions

Jamaica continued to manage the heavy legacy of its 1990s financial sector crisis, which had required the Jamaican government to bail out the banking system at a cost estimated at approximately 40-45% of GDP — one of the most costly banking crises relative to GDP in recorded history. The resulting public debt burden — approximately 130% of GDP — generated enormous interest costs that crowded out productive public expenditure and constrained monetary policy flexibility. The Bank of Jamaica maintained tight monetary conditions, keeping domestic interest rates elevated relative to international benchmarks to support exchange rate stability and contain inflation. The NHT’s subsidised mortgage rates — 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings — were the primary mechanism for affordable housing finance in this environment.

Looking Ahead to Q1 2003

The Iraq war appears increasingly likely in 2003 — the diplomatic endgame is playing out at the UN but the US military build-up continues apace. The Fed at 1.25% has significant room to ease further if the economy weakens. Equity markets are near multi-year lows. For Jamaica, sustained fiscal adjustment and the management of the debt burden remain the overriding domestic priorities.

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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