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Mortgage sector: Bailout or another recapitalization?

Over the years, mortgage operators have canvassed more for bailout of the sector by the federal government than the government creating an enabling environment for the sector to grow.

Issues of high interest rate, long and costly land titling process, the Land Use Act don’t get much attention and these are the major challenges that have not allowed the sector to grow and mature.

The bailout call has become more strident these days with the impact of Covid-19 on the economy. Many sectors have been affected including mortgage, which has seen low deposit and rising loan default rate.

Recently, Olabanjo Obaleye, managing director, Infinity Trust Mortgage Bank Plc, was reported to have said that the Federal Government must come to the aid of the mortgage industry over the cash crunch caused by COVID-19 pandemic.

Obaleye noted that government did not provide financial relief and other structural assistance to mortgage banks and the housing sector despite the challenges posed to the real estate sector by the COVID-19 pandemic.

As logical as Olaleye’s argument seems, we are caught in the web of what the mortgage sector really needs — government’s bail out of private enterprises which primary mortgage banks (PMBs) are, or another recapitalization that over 50 percent of them could not survive an earlier one?

When the Central Bank of Nigeria (CBN) governor, Godwin Emefiele, laid out a five-year policy thrust that included recapitalising the banking industry, it was feared that the policy might cascade to the fledgling mortgage sector.

The subdued yet persisting anxiety, especially among the PMB operators, is not misplaced given their experience with recapitalization. Again, the mortgage industry in the country has disquieting statistics enough to compel conclusion that the problem of the industry goes beyond recapitalization.

At the moment, the statutory capital base of the PMBs stands at N5 billion for operators with national licence and N2.5billion for those with regional licence. The capital base was raised from N100 million following an earlier recapitalization and consolidation that also reduced the number of PMBs to 34, from over 80. Ten of the 34 are national while the rest are regional operators

Available records also show that the size of the mortgage market as at 2010 was N284 billion and in 2012, it was N348.1 billion. In 2016, the industry was valued at N518.76 billion. In spite of this, only about 5per cent of the country’s housing stock estimated at 13.7million units is in formal mortgage.

Another worrisome statistic on this industry shows that for the whole period spanning 1960 to 2009, the industry generated only 100,000 transactions, and 181,519 transactions from 2010 to 2016. Worse still, the contribution of mortgage finance to Gross Domestic Product (GDP) in the country is less than 1 percent.

Like other close watchers of this industry, we are worried with these statistics. We are all the more worried that despite the recapitalization and the recent N18 billion refinancing of some PMBs by the Nigeria mortgage refinance company (NMRC), the industry’s impact on the housing sector remains to be seen.

It is believed that the inability of the industry to impact positively on the housing sector in spite of improved liquidity means there are fundamental problems that need to be tackled before anybody considers another round of recapitalization for the struggling PMBs.

Nigeria has a staggering housing deficit that is over 20 million units. The cause of the gap is traceable to identified problems in the mortgage industry, which, in turn, are the causes of the slow growth that the industry has suffered over the years.

Mortgage in the country lacks clarity. It is inaccessible and unaffordable. When Nigerians who actually need mortgage to buy or build houses approach the PMBs for loans, they are always asked to provide things they don’t have, meaning that mortgage is not accessible for those that actually need it.

Lack of clarity in the mortgage industry means there is no unified system and this, to us, is a major problem. As it is today, there is nowhere the government has published a mortgage rate which the mortgage banks have to use or a mortgage standard or process which the banks have to fit into.

It is not hard to see, therefore, that there is no clarity in the industry and, if there is any such thing, as both the regulator and operators are wont to say, it is not yet publicised and so people don’t know and, if people don’t know, it means such a process does not exist.

Affordability, which has to do with interest rate on mortgage loan, stands tall between the borrower and the loan. Many Nigerians hold the view, which we share, that there is no mortgage in Nigeria because it is difficult, most times, to distinguish between commercial from mortgage loans. Added to this, mortgage loans in Nigeria are usually short term as against long term in other jurisdictions.

This, in our view, is a major problem because housing development, for instance, is a long term project and it is not viable neither does it make economic sense to take a short term loan with double digit interest rate for a long-term project. Similarly, it is not viable to take long-term loan, where available, with double digit interest rate on low income which most loan seekers have.

For these and more, we reason that the solution to the problem of the mortgage industry in Nigeria today does not consist in another round of recapitalization or increased liquidity as experience and available statistics have shown, but in creating the needed environment that will enable growth of the industry.

The industry has to improve. The operators have to be less opaque while property developers have to be encouraged to build mortgage-viable and ready properties. Interest rate on mortgage loans have to come down to single digit and made available.

Indeed, we want a situation where the whole process of securing mortgage has to be made clearer and more transparent, and mortgage has to be available on the retail high street such that every time a loan seeker goes out seeking, he sees one.

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