The Venezuelan National Assembly has been considering and is close to approving a Bill for the protection of mortgage holders, which if approved as it stands, will certainly undermine the health of the Venezuelan financial system and introduce new distortions into the country’s economy.
The Bill has as its basis the 2000 Constitution which defines housing as an integral part of the social security system. Thus, it aims to protect mortgage holders who are individuals for their principal place of residence.
First, the law states that the Banco Nacional de Ahorro y Prestamo will acquire all of the mortgages issued under government program, which may also acquire those issued by banks with their own resources. This will de done once all of those mortgages are recalculated by the issuing banks, according to the current Bill.
The Bill establishes that it is mandatory for banks to have at least 15 to 18% of its credit portfolio in mortgages for the main residence of individuals. The Bill also establishes limits to the monthly payments that a debtor can make, limiting it to between 5% and 20% of the monthly income.
Under the new bill, any debtor that is behind in payments in violation of the contract may stop any proceedings by the bank against his home by paying 50% of the current debt.
The most remarkable aspect of the Bill is that it establishes that the maximum interest rate that may be charged will be a “social” interest rate, defined according to the prevailing lending rate of the banking system (TAPP). If that rate is less than 20%, the rate will be 65% of the rate. If that rate is between 20 and 40% the prevailing rate TAPP will be multiplied by (0.65 -(TAPP-0.20)). If the TAPP is above 40%, the social interest rate will never go above 18%., but in no case may the sum of principal plus interest exceed 25% of the income of the holder of the mortgage.
Finally, the Bill suspends all legal procedures involving mortgages until the banks have adjusted all calculations retroactively to the above social interest rates and those who hold mortgages under conditions unfavorable when compared to the new legislation will have their mortgages adjusted.
Clearly, the bill would be extremely negative in all of its aspects for the Venezuelan banking system and has a perverse retroactive aspect to it that will hurt future earnings of the banks. Moreover in the end, this subsidy, which is aimed at protecting the population in general, will likely benefit those that already have homes, have good incomes and are a good credit risk for banks and not those that would need the mortgages the most. They are the ones that could easily remortgage their homes and make money out of these subsidize interest rates. Incredible!