Jamaica Homes Quarterly Mortgage & Housing Finance Review — Q3 2010

Publication date: 5 October 2010 | Covering: July – September 2010

Quarterly Briefing

• FRESH — Bernanke Jackson Hole August 27: Signals Fed “ready to provide additional accommodation”; QE2 widely expected November (39 days ago)
• Double-dip fears: US Q2 GDP revised down to 1.6%; jobless claims elevated; housing starts weak; consumer confidence fragile
• Dodd-Frank signed July 21: Comprehensive US financial reform; Volcker Rule; consumer protection bureau; OTC derivatives reform
• BP Deepwater Horizon: Well finally capped July 15 after 87 days and 4.9mn barrels; largest marine oil spill in US history
• Fed: August 10 restarts Treasury purchases using MBS principal payments; signalling continued accommodation
• Pakistan: Catastrophic floods July–August; one-fifth of country inundated; 20 million displaced; agricultural destruction
• Greece: First bailout implementation; IMF review positive; spreads narrowing from May peaks
• Jamaica: IMF Stand-By Arrangement approved February 2010; first year implementation; fiscal adjustment ongoing

Jackson Hole Signals QE2; Double-Dip Fears

Federal Reserve Chair Ben Bernanke’s speech at the Jackson Hole economic symposium on 27 August was the defining market event of the third quarter. Bernanke explicitly signalled that the FOMC was “prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly” — language that markets immediately interpreted as a strong signal that a second round of quantitative easing was coming at the November meeting. The speech came against a backdrop of deteriorating economic data: the second revision to Q2 GDP confirmed growth of just 1.6 per cent annualised, well below the pace needed to reduce unemployment; weekly jobless claims remained elevated; and the housing market had fallen back after the expiry of the first-time buyer tax credit in April. The double-dip recession debate — whether the US recovery would prove sufficient to be self-sustaining or would falter back into contraction — was at its most intense through the summer of 2010. In retrospect, the recovery proved durable, but the uncertainty at the time was genuine. The Fed’s decision on 10 August to restart Treasury purchases using the principal payments from its maturing mortgage-backed securities — rather than allowing its balance sheet to shrink — was a preliminary step that reinforced the QE2 signal.

Dodd-Frank; BP Deepwater Horizon

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on 21 July, the most comprehensive overhaul of US financial regulation since the 1930s. The legislation introduced the Volcker Rule restricting proprietary trading by banks, created a new Financial Stability Oversight Council for systemic risk monitoring, established a Consumer Financial Protection Bureau, and brought over-the-counter derivatives onto regulated exchanges for the first time. Critics argued the legislation was too complex and would constrain bank lending; proponents contended it was necessary to prevent a repeat of 2008. The BP Deepwater Horizon well — which had been gushing oil into the Gulf of Mexico since the rig’s explosion on 20 April that killed eleven workers — was finally capped on 15 July, ending the largest accidental marine oil spill in US history after 87 days and an estimated 4.9 million barrels released. The spill caused catastrophic damage to the Gulf Coast ecosystem and fishing industry, and the cleanup and legal costs ultimately exceeded US$65 billion for BP.

Jamaica: IMF Stand-By; Mortgage Market Conditions

Jamaica’s IMF Stand-By Arrangement, approved in February 2010, was in its first year of implementation through the third quarter. The programme represented Jamaica’s attempt to address its chronic fiscal imbalance — a public debt approaching 130 per cent of GDP and interest payments consuming more than half of tax revenues — through a combination of primary surplus targets, public sector wage restraint, and structural reforms. The fiscal adjustment was bearing some fruit in terms of improved primary balance metrics, but the cost in terms of economic growth and consumer confidence was significant. Commercial mortgage rates remained elevated due to the high government borrowing costs that crowded out private credit, and the BOJ’s policy rate was constrained by the exchange rate and inflation management imperatives. The NHT’s subsidised mortgage tiers provided the primary accessible housing finance for qualifying contributors, and volumes were modest but consistent. The diaspora property market showed some resilience, supported by improving US economic conditions even as Jamaica’s domestic economy remained subdued.

Looking Ahead to Q4 2010

The November FOMC meeting will almost certainly deliver QE2, with the only uncertainty being the size and pace of purchases. The US midterm elections on 2 November are expected to produce significant Republican gains. For the eurozone, the Greek programme’s first-year implementation and Ireland’s deteriorating fiscal position are the near-term risk factors. For Jamaica, the IMF programme reviews and the trajectory of remittance flows — tied to the US recovery’s momentum — will frame Q4 conditions.

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.

Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com