• Tuesday, July 16, 2024
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BusinessDay

Toward a sustainable mortgage finance programme

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Much has been said about the huge need for affordable housing in Nigeria and the dearth of supply, particularly in the urban centres around the country. The conversation has taken on a new urgency in recent times, given that the problem continues to grow exponentially. Several issues such as high cost of building materials, availability of affordable land, and the absence of low-cost long-term finance have been cited as some of the impediments to the production of housing. While the government cannot directly manage the cost of building materials, it can provide land and direct the flow of capital to housing.

It is a known fact that for most salaried people, it is almost impossible to repay a mortgage loan at prevailing conditions (5-year term at interest rates upwards of 20 percent). Thankfully, the Federal Government recognises this and is finally tackling this issue with the establishment of an institution with the aim of providing the platform for accessing low-cost long-term capital through the securities market. Though long overdue, it is a laudable initiative that will not only increase homeownership opportunities, particularly for the burgeoning middle class in Nigeria, but also drive economic activity and provide low skilled jobs. In the process, housing will take its rightful place in the hierarchy of drivers of economic growth.

The fact that this refinance institution is necessary is an indication of the failures of the Federal Mortgage Bank to operate as intended by the Act that established it. The Act in itself had lofty ideals. Perhaps one reason for the failure is that the timing of the Act was ahead of market readiness. Current conditions, however, are ripe for such an institution in Nigeria with overwhelming need, and capital market readiness. For it to function as intended, here are some pointers on what should be an integral part of its structure and operation.

1) The institution should be an independent public benefit corporation separated from the civil service structure, and should make no pretences to being either a money centre bank or an investment bank. Its sole function should be to find ways to maintain liquidity in the mortgage market. For this reason, it should not be afraid to think big, think differently, and be bold in creating its product programme. The Nigerian financial markets are in growth mode and diversifying, with a potential for immense product absorption capacity. Capital market structures are universal and development of product programmes can therefore be guided by the failures of the Federal Mortgage Bank, and informed by what has been done elsewhere. In the United States, for instance, the creation of Fannie Mae and Freddie Mac opened up the mortgage markets by soaking up mortgages originated by banks and non-bank mortgage institutions under standardised underwriting parameters. This freed up capital to create new mortgages, which in turn gave rise to the creation of esoteric mortgage-backed securities that further boosted liquidity. Despite what has happened in the world mortgage markets since 2008, there is no denying the housing boom created as a result of constant liquidity and the impact on economic growth. True that Fannie Mae and Freddie Mac were also caught up in the hype of the mortgage markets that created the bubble and had to be bailed out, there is consensus that the idea behind the creation of these institutions was sound, making the dream of homeownership a reality for those who would otherwise not have the opportunity. With that in mind, there are lessons learnt from the mistakes made in that market, and safeguards can therefore be built in to avoid similar mistakes. While there is no suggestion to ape the operations of the US system, examining its merits would be a worthwhile exercise.

2) The mortgage refinance institution should have bond issuance authority, with its bond service obligation met with revenue from the sale of the real estate financed with proceeds from the bonds. This would keep the debt so created out of the general obligations of the Federal Government, and therefore not feature in the debt-to-GDP calculations. This way, an unlimited amount of housing bonds can be issued, subject only to demand from the markets. The Federal Government can also provide an additional layer of safety by issuing backstop guarantees that would attract offshore investments. Bonds structure should reflect the realities of the capital markets and consumer behaviour.

3) The institution should avoid having a monolithic product. Multiple products should be created and targeted at different aspects of housing production, and not just the creation of mortgage-backed securities. Flexibility should be built into the product programme so it can respond quickly to changes in market conditions.

4) In order to avoid a bottleneck situation, the Federal Mortgage Bank should not be the sole originator of these mortgages. Banks and Primary Mortgage Institutions can be co-opted into participating in the process, for capped origination fees under programmes with clear guidelines. Banks should, however, be made to “pay to play”. Financial institutions, especially banks and including insurance companies, have a responsibility to “give back” to the communities in which they make money. As such, a case can be made for mandatory participation in mortgage revenue debt issued for housing, by buying bonds. The level of give-back can be a ratio of pre-tax profits, and the amount so reinvested can be tax-exempt as incentive to participate. Since these financial institutions have a national footprint, the community can therefore be defined as the entire country. Pension funds can be required by law to hold a certain percentage of their portfolios in housing bonds since their outlook is long term and as such in concert with the aims of the institution – making long-term mortgages available to all who qualify.

While the function of this refinance institution is crucial to the alleviation of the housing shortage in the country, it would be naive to believe that it is a cure-all. The institution should be an implementation tool that works within an articulated federal housing policy. In this regard, there should be a coordinated effort between the institution, Ministry of Housing, Federal Housing Authority, and Federal Mortgage Bank.

 

Okuzu, formerly a senior banker at Citi Community Capital, a unit of the Capital Markets Group, Citigroup Inc. in New York City, is currently a housing finance consultant.