Caribbean Industrial construction Puerto Rico

Inventory of unsold homes keeps growing

The challenges keep piling up for Puerto Rico's real-estate industry, in both the residential and commercial sectors, as depressed values, weak sales and excess inventories continue to place undue stress on banks and property owners alike.

According to various industry players interviewed by CARIBBEAN BUSINESS, local banks have successfully rallied in selling off most of the toxic assets, or bad loans, stemming from delinquent mortgage loans and repossessed properties.

Despite this, experts predict that a second wave in the fire sales of repossessed properties will kick off later this year, the result of a looming deadline imposed by the Federal Deposit Insurance Corp. (FDIC) when it closed three local banks in 2010.

In short, the FDIC agreed to cover up to 80% of the losses of the failed banks' portfolios, most of which comprised mortgage loans and were acquired by three other banks. However, the FDIC's loss-share agreement is set to expire April 30, 2015, giving local banks less than a year to divest themselves of the remaining toxic assets or else incur the full financial burden of their bloated property inventories. In other words, the banks would have to hold a fire sale to sell the assets, otherwise the FDIC guarantee will be rendered null. This would represent a huge hit on the banks' bottom line.

No matter how hard banks are trying to sell off properties on one end, more repossessed properties are entering their portfolios on the other end. And even though financial institutions are trying to hold off repossessions as long as possible, the dismal economic and fiscal environment, coupled with a large segment of the population leaving the island, is making such an endeavor next to impossible.

This comes at a bad time for the banking sector in general, which in the first quarter of this year saw its loan portfolio—essentially what is owed to the banks in terms of personal, mortgage and car loans, as well as credit-card debt—fall to $44.1 billion, its lowest level in more than a decade, according to the latest report by the Financial Institutions Commissioner (OCIF by its Spanish acronym), Rafael Blanco. Mortgage loans in particular, which comprise about 61% of total loan portfolios in Puerto Rico, went down by 11.9%, its fourth-consecutive quarterly drop.

"The banking sector has had a tough time adjusting with the times. It's clear they have tried their best to get rid of the bad loans as effectively as possible, but there's only so much that they can do [in a constantly weakening economy]. We may face a prolonged period in which property values will remain fl at and, in some cases, may drop even more. We will just have to let the current situation follow its course, " said economist Juan Lara of Advantage Business Consulting.


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Q&A

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What are the industries of Puerto Rico?

Petrochemicals, Pharmaceuticals, Tourism and Rum.