Liquidity facilities as development tools for mortgage markets

The gross inadequacy of affordable housing for the teeming Nigerian populace 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.

Nduese Essien, Minister of Housing

In this piece, Yinka Kolawole examines the possible impact of a mortgage liquidity facility in a nascent mortgage market like Nigeria.

It a well known fact that the dearth of cheap loanable funds occasioned by a virtually non-existent mortgage market is the bane of housing development in Nigeria.

There are of course other challenges such as the issue of Governor consent under the Land Use Act; unfavourable foreclosure laws; ineffective security realisation by banks and; high statutory cost structure of land transactions, amongst others.

But some experts have suggested that the establishment of a mortgage liquidity facility institution in the country will go a long way in helping to provide the much needed long term funding for the housing sector which is currently experiencing acute liquidity shortage and a general lack of enabling environment.
A mortgage liquidity facility is 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.

Associate Operations Officer, International Finance Corporation Private Enterprise Partnership for Africa (IFC PEP Africa), Wambui Chege, at a conference in Lagos, last year, remarked that 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 noted that the benefits accruable from mortgage liquidity facility are many. According to him, it secures long term funding at attractive rates, makes loan products pricing more competitive, supports development of small lenders and supports liquidity management for the lenders. While 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 –  “Is there a “critical mass” 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 – function of capital market – what is the rate of benchmark index?” Also speaking on the liquidity facility, Rick Roque of LenderField Technologies, US, noted:

“There 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 helpful  in markets where the mortgage lending infra-structure and environment have not developed sufficiently to allow for other more sophisticated alternatives such as securitisation or covered bonds.”

The IFC, not too long ago, 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 secondary  mortgage market in the country and thus boost activities in the dippingoperations in the primary mortgage market.

The move follows a World Bank report on Nigeria’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.

“The 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.

“The 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.” The World Bank report, however, noted the impediments to effective operation of mortgage in Nigeria, stating that, “while a perfect legal framework would be ideal, no country has yet achieved this and many have highly housing finance systems with less than satisfactory legal framework.

“The existing legal framework is quite capable of supporting a massive expansion of mortgage lending; the necessary reforms to the transaction process should not be held up while discussions take place on possible legislation. Rather, the legislation should be a separate world stream, which can run at a different pace from the short term issues,” the report stated.