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WILL THE NEW YEAR RING IN ‘AFFORDABLE’ MORTGAGES?

From the stroke of midnight on January 1st, 2014, Nigerians should be able to access more affordable mortgages according to Dr. Ngozi Okonjo-Iweala, the Minister of Finance and the Coordinating Minister of the Economy. The Minister’s New Year present to Nigerians is based on the expected launch of an Institution known as Mortgage Refinancing Company (MRC) next month.  The primary aim of MRC is to support mortgage originators such as the Mortgage Banks and the regular banks to increase mortgage lending by refinancing their mortgage loan portfolios.



The envisaged scenario using a very simple example is that, if a bank for instance lends out N1billion on mortgages, it has to wait until the mortgagors (borrowers) start paying back before it can lend again. But if the same bank goes to the MRC to ‘sell’ the mortgages, it will have another N1billion to lend again and the cycle is repeated again and again. So the limited liquidity (cash banks can lend as mortgages) presently experienced now should be eased.

Where is MRC getting its money from?
The World Bank is assisting the federal Government to set up the MRC with financial support of $300 million (N48billion).This soft loan under the bank’s International Development Association concessionary lending window is at zero per cent interest and is repayable over 40 years after a ten years moratorium. Other sources of funds will come from equity contributions from part owners in the institution like the International Finance Corporation and long term bonds which the MRC will issue. Experts are optimistic that this kind of long term funding will help ameliorate the mismatch of funds, where short term funds were used to create long term mortgages.

Current mortgage blues
The mismatching of funds is just one of the numerous issues that have resulted in an abysmally low rate of mortgages in the country. For instance, in his 2013 Ministerial press briefing, Mr Hakeem Muri-Okunola, Permanent Secretary, Lands Bureau, Lagos State, revealed that only 1,039 applications for registration of mortgages were received in 2012. Considering that banks and Primary Mortgage Institutions (PMIs) limit mortgage funding to locations in Lagos, Abuja and Port Harcourt only (with Lagos leading the others with a significant gap) and that a substantial number of those mortgage applications were for corporate mortgages, it would be right to say that mortgages are virtually non-existent in the real estate space. Presently there are about 80 PMIs, each of them involved in mortgaging based on its ability. Only about five of them are engaged in the business of giving mortgages with most of these five limited to the National Housing Fund (NHF) business – getting 4% funds from FMBN loan with onward lending to borrowers at 6%. The maximum loan amount under the NHF is N15m and so it is not adequate for a very large number of real estate transactions. Out of 20 Nigerian Banks only six currently run a structured mortgage program, while four others have run mortgage programs in the past but have stopped while all offer mortgages more as a strategy to get or keep prominent customers. Those who offer mortgages do so at quite strenuous terms: minimum of 25% equity contribution with interest ranging from 18% to 24% per annum with numerous sundry fees. If you get a N30million mortgage for 15 years at 20% interest, you will have to pay about N530,000 per month for the next 180 months. For those who have done the math, it comes to about N95million! Not surprisingly, there is a high level of default and this in turn makes mortgage lending very unattractive, especially as the banks complain that the courts are skewed in favour of a defaulter and it is extremely difficult and costly to realize (sell) the house when the mortgagor fails to meet his obligations.

Will the MRC be the solution?

The theory behind the MRC intervention is that better liquidity will result in more mortgages and this will push interest rates down. But what kind of rates should Nigerians expect? We spoke to several experts and while a range of 12% to 16% per annum was given, no one was brave enough to suggest single digit rates. The challenge however is even at these rates; repayment by the ordinary Nigerian might not be ‘affordable’ given the high cost of apartments. CASTLES Lifestyle always finds it difficult to profile properties for the Budget Property column which looks at properties that are N5m and below. It is quite difficult to find apartments with ‘mortgage friendly’ titles for under N35m and so setting the MRC alone might not bring affordable mortgages because there aren’t affordable houses. Other experts have expressed caution because of the macro economy with double digit inflation etc. and the micro economy of the banking sector where preference seems to be more for Government securities and fees rather than lending. They are sceptical if the MRC alone will convince the bankers to look more at lending to earn their profits than the other safer investments. Perhaps the PMIs with their stronger capital base will now be the real dominant force in mortgage lending in this dispensation. All in all, granted that there are challenges, the MRC is a great first step by the Government to intervening in the mortgage market and it is up to operators – developers, PMIs, banks, estate practitioners etc. to take advantage of this new development.

 - CASTLES' WEEKLY

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