The gross inadequacy of affordable housing for the teeming Nigerian populace, especially in urban areas, has constituted a major challenge to succeeding governmentâ€™s since the nationâ€™s independence.
The development has been attributed to a number of factors, one of which is the lack of a thriving mortgage market in the country thus making accessibility to mortgage facilities extremely difficult. In this piece, Yinka Kolawole examines the possible impact of a mortgage liquidity facility on housing development in Nigeria.
The challenges facing mortgage industry in Nigeria include: a dearth of cheap loanable funds to increase the existing housing stock on continuous basis is the bane of the mortgage industry in the country; Governorâ€™s prior consent under the Land Use Act; removing the arrangements for foreclosure proceeding on real estate from general common law provisions and; establishing specialised courts/tribunals that will fix the terms and timing of challenge/contestation of foreclosure.
Others are: security realisation by banks; commencing the automation and eventual integration of all records and processes of local, state and Federal Government land and; reducing statutory cost structure of all land transactions.
But the establishment of a mortgage liquidity facility institution in the country will go a long way to help address this problem, to a large extent, with the aim of providing the much needed long term funding for the housing sector which is currently experiencing acute liquidity shortage and a general lack of enabling environment.
At a recent conference on real estate in Lagos, Associate Operations Officer, International Finance Corporation Private Enterprise Partnership for Africa (IFC PEP Africa), Wambui Chege, defined a mortgage liquidity facility as a financial institution designed to support long-term lending activities of mortgage lenders, and acts as intermediary between primary mortgage lenders and capital markets.
The facility is also a low risk simple institution which issues bonds to raise long-term finance, purchases loans with recourse or refinances mortgage loans with recourse.
According to him, the role of a mortgage liquidity facility is basically to develop the primary mortgage market by providing funds to mortgage lenders at better rates and longer tenors, thus facilitating affordability; provide longer term funds to mortgage lenders, reducing maturity mismatch between housing loans and sources of funds and; ensuring mortgage loan standardisation.
The IFC official stated that the benefits accruable from mortgage liquidity facility are many. For the lenders, it secures long term funding at attractive rates, makes loan products pricing more competitive, supports development of small lenders and supports liquidity management.
For home buyers, it ensures access to more affordable home loans and increased competition among lenders with more attractive loan packages will lead to possible access for lower borrowers.
He however noted that there are issues to consider in Nigeria for a mortgage liquidity facility to be effective. The issues are: Is there a â€œcritical massâ€ of mortgage loans?
Is there a functioning primary mortgage market? Can one obtain a secure title for a mortgage? What are costs associated with issuing corporate bonds? Is there an adequate supply of houses? Are the houses affordable to the middle class (at least) or do they target high income earners?
Pricing â€“ function of capital market â€“ what is the rate of benchmark index?
Also speaking on the liquidity facility, Rick Roque of LenderField Technologies, US, noted: â€œThere is a valuable developmental role that mortgage liquidity facilities can play in nascent mortgage markets as an intermediary between capital markets in the primary mortgage markets.
Lending facilities can be helpfulÂ in markets where the mortgage lending infra-structure and environment have not developed sufficiently to allow for other more sophisticated alternatives such as securitization or covered bonds.â€
It would be recalled that earlier in the year, the IFC pledged to support an initiative by operators of the mortgage finance sector in the country, under the aegis of the Mortgage Banking Association of Nigeria (MBAN).
The proposed institution is expected to provide a lifeline to mortgage operators by engendering a vibrant secondaryÂ mortgage market in the country and thus boost activities in the dippingÂ operations in the primary mortgage market.
The move follows a World Bank report on Nigeriaâ€™s Financial System Strategy (FSS) 2020 on housing finance presented to MBAN, after which the World Bank agreed to help set up the institution through the IFC. The report was presented by Mark Boleat, consultant at Boleat Consulting and Simeon Walley, Office of the Vice Presidency, Financing and Private Sector, of
the World Bank. Under the proposal, the World Bank pledged support to the proposed institution, which will be in
the form of a special purpose vehicle as a short term strategy in the provision of long term, optimal interest rate funding for the mortgage/finance sector in Nigeria.
The institution will function as a refinancing company to be jointly owned by stakeholders such as MBAN/Primary Mortgage Institutions (PMIs), African Development Bank, IFC, the Central Bank of Nigeria (CBN) and other interested investors, with an approved management structure and a board of directors, made of investors.
In the report, the World Bank noted that a liquidity facility could provide an interim step for Nigeria between having a fully functioning secondary market and the need to extend the maturity of the liabilities base from deposit funding.
â€œThe mortgage liquidity facilities can fulfil a dual role. First, they can provide direct funding, by purchasing mortgages or lending on the basis of mortgages being assigned. The second role is to provide liquidity to lenders. This facilitates a much greater level of maturity transformation and enables banks to better leverage their deposit base for lending as mortgage loans. This would be a particularly useful function for many Nigerian banks that are not capital constrained and are also relatively liquid, but just lack long-term funds.
â€œThe liquidity facility would fund itself by issuing standard bonds with tenors of five years or longer depending on market conditions. These would guarantee the liquidity facility and if it is in public hands therefore benefit from a quasi-sate guarantee. Ideally, the facility should be well capitalised and the bonds rated so as to provide the basis for non-distortive market pricing.â€
The World Bank report noted the impediments to effective operation of mortgage in Nigeria.