San José, Costa Rica, since 1956

Mortgage Market on Firm Footing – for Now

So far, “subprime mortgage crisis” is not part of the Costa Rican housing market’s vocabulary.

Contrary to the scene in the United States, local banks are flush with cash and willing to lend it to consumers at relatively low interest rates.

“It’s an ideal time to acquire debt,” said Luis Diego Rodríguez, a loan processor and closer at Stewart Title.

Thomas Ghormley, owner of the Century 21 in Jacó, agreed.

“All of the banks are lending like crazy,” Ghormley said. “The banks are full of money.”

And Costa Ricans are willing borrowers. As of March, the total amount of debt assumed for housing loans reached ¢2 trillion colones ($4 billion) – a sum representing 29 percent of total credit market wide.

In total debt, consumers took on ¢6.8 trillion ($13.6 billion) by the end of March. That marks a 39 percent increase over the previous year.

Relatively low interest rates have Costa Rican consumers sprinting to the bank. The average interest rate this week in colones is at 14.53 percent while it registered at 9.33 percent in dollars, according to the Central Bank.

In a possible move to protect itself and control inflation, Banco Nacional raised its average rates for new loans by 1 to 1.3 percent as of the end of April, according to a report in La República.

Still, ripples from the U.S. mortgage crisis could rock the Costa Rican economy, if certain precautions are not taken.

The subprime disaster occurred when tens of thousands of homebuyers, most of whom should not have been extended mortgages in the first place, defaulted on their loans, causing massive losses for banks and creating a credit crunch.

Luis Mesalles, an economist at the Central American Academy, warned that Costa Rica could continue to see falling exports, weak foreign investment and greater volatility in the financial sector as a result of the country’s close economic ties to the United States.

Any slowdown in Costa Rica’s real estate market and housing construction could be an ominous sign.

“We could see a little of what happened in the United States,”Mesalles said at a press conference this week.

As the U.S. economy shrinks, so does Costa Rica’s. Exports to the United States already fell by 4.6 percent in the first quarter this year, with a 40 percent fall alone in textiles.

Mesalles warned that a weakening U.S. economy could mean shrinking direct foreign investment. Fewer dollars could create high demand for the greenback. Investors would then dump their colones and dive for dollars, decreasing the Tico currency’s value.

Such a scenario played out last week when the average exchange rate jumped by 15 colones at public and private banks.

Meanwhile, in the United States, credit sources are drying up as lenders continue to be spooked by talks of recession and the subprime mortgage crisis.

New single-family home sales were down 34 percent from the fourth quarter last year, compared to the same period in 2006, according to the Department of Housing and Urban Development’s Web site.

Existing home sales are also in a slump, with sales dropping by 21 percent over the same period.

Considering the shrinking U.S. housing market, some potential buyers are turning their money to Costa Rican shores. But doing so can be a challenge for the uninitiated.

Up until about three years ago, the local mortgage industry was not open to foreigners.

Potential homebuyers had to come with fat pockets or get financing abroad.

The rules have changed since then, and Costa Rican-based brokers are filling the void. They say the mortgage application process is similar to that found in the United States, with one big difference: money talks, not assets.

Don Nisbet, a mortgage broker and founder of Funding Costa Rica, said one of his clients was sitting on a $15 million property and wanted to take out a loan for $750,000.

He was denied.

“People have to understand that this isn’t the United States and the banking requirements are different here,” Nisbet said. “You have to prove that you have the income to pay it back.

“I’ve been very pleased with the bankers here and the fact that they’re protecting the bank’s assets.”

On average, potential buyers have to put about 25 percent down before a local bank will agree to a home loan.

A subprime option does not officially exist, although there is a market for it.

Rodríguez, of Stewart Title, said the local banking system does not have the same credit score standards – qualifying buyers as “prime” or “subprime” – as is the case in the United States.

Those with less-than-pretty credit records have to turn to an unofficial source for money. Loan sharks advertise their services in newspapers, sidewalk postings and by word-of-mouth – offering private funds for short-term loans at exorbitant interest rates.

Nisbet said he frequently fields requests from interested private parties and banks.

“We get phone calls all the time from European banks looking for a viable place to lend their money,” he said.

Prime buyers are still looking at Costa Rica as a second home and retirement destination, according to several brokers.

Gill Phelan, manager of Grand View Estates and Costa Rica Tropics developments, said he does not deal with the subprime mortgage crowd.He groups his U.S. clients into two categories: those with plentiful liquid assets and those with shrinking retirement plans who are looking at Costa Rica as a more attractive place to live. Here, a comfortable new home can be had for about $200,000.

“People in the United States are trying to salvage what they have,” Phelan said.


Comments are closed.