The first to feel the economic impact of any public policy promulgated by the government is the financial sector, at times, even before it is implemented.
I remember my surprise, as I started my professional career in 1992, when the financial markets adjusted interest rates and asset valuations, only because the polls at the time had Clinton beating Bush senior in the race for the presidency of the U.S.
The performance of a loan portfolio is an indicator that reflects the socio-economic realities. I had the privilege of working in home mortgage lending from 1991 to 2008 and experienced the radical changes in the real estate industry as a result of the different public policies announced during those two decades. When Section 936 of the U.S. IRC was revoked, many manufacturing companies in PR operating under 936 did not wait for its expiration ten years later. Those companies in the garment industry and electronics, reporting the largest number of employees, began to shut down operations almost immediately. Even though these individuals did not earn the highest wages and benefits in PR, still, receiving a weekly payment for work done, brought financial stability and steady income to a family. The abrupt shut down of factories all over the island at the end of the 90’s affected lower income families and even though some found other jobs and tried to reinvent themselves, their individual credit ratings were negatively impacted.
The large amount of properties available for sale, new and repossessed by the banks, moved the government to establish a new program at the beginning of 2000, called “Llave para Tu Hogar”, which offered $15,000 in cash for the down payment of the purchase of the home or for closing costs. This was intended to facilitate the private, non-conforming mortgage loan financing for the acquisition of a property, but the basic problem was not resolved, which was the need to create massive job opportunities for the lower middle class of workers, such as Section 936 had done in the past, and bring back stable and steady income to the working families.
In 2009, the government ended this program coinciding with the real estate bubble burst in the US. This situation eroded real estate values in PR to the point where properties were worth substantially less than the amounts owed in their mortgages to the banks. The market for new homes, principally those to be sold for $250,000 or more, collapsed. Construction projects filed for bankruptcy and unfinished houses were put up for sale by the banks.
But crises bring opportunities, particularly for those individuals holding cash. So, in 2012 legislation creating investment opportunities was approved to attract private capital to PR; among them Act 22. This legislation provides incentives for individual investors to move to PR from the Mainland, purchase real estate property and reside here among us. More than 600 decrees have been granted to these investors.
Economic development incentives play an important role in any jurisdiction’s efforts to create jobs and improve the economy. But, it is up to us in government to extract the most benefit for the people of PR out of this very attractive incentive. In my next column, I will discuss ways in which we can achieve this.