COVID-19: What a viable mortgage industry can do when economy is in crisis
At the onset of the coronavirus pandemic, while the rest of the world was still struggling to figure out what the virus really was, the Federal Reserve Bank, the central banking system of the United States, had taken proactive steps, cutting rates on mortgage loans with a view to stimulate the economy.
Within two weeks, the bank cut rates twice to almost zero percent, thus encouraging first home buyers to take loans to buy homes. And, according to experts, even though coronavirus is taking toll on America and its economy, it is not as deep in the economy as it is in other economies.
This only goes to show what role mortgage can play in an economy at a time like this.
Experts have argued that if there is any time Nigeria needs to diversify its economy by looking at other growth areas, that time is now. And one of the areas that should readily come to mind is mortgage.
From an Olympian height of $110 per barrel in 2015, oil price has, in just five years, tumbled to less than $50 per barrel in March 2020 and there are speculations that it may plummet to $20 per barrel if the Coronavirus impact and fears do not abate.
Most developing economies of the world aspire to have a viable mortgage industry in the understanding that it means so much for the growth of their economy.
In the advanced economies of the world, the industry has made and continues to make significant contribution to their GDP and the overall economic growth and development.
In Nigeria, the story is different. The industry is still struggling to find its feet and this is why mortgage finance as a percentage of Gross Domestic Product (GDP) is as low as 0.5 percent which is several steps behind other economies including Mexico, Malaysia and South Africa where mortgage contributions to GDP are as high as 10 percent, 25 percent and 29 percent respectively.
However, notwithstanding the industry’s low contribution to GDP coupled with the economic challenges arising from low oil revenue, industry operators are saying that mortgage has all the potential to stimulate the economy when all the obstacles inhibiting its growth are removed.
The relative newness of the industry, lack of understanding of its dynamics and operational models by many Nigerians, and poor appreciation of the need and the ultimate benefits of keeping money in a mortgage bank are some of the militating factors.
But an economy like Nigeria’s can benefit a lot from a flourishing mortgage industry as it will help in directing the economy in the desired direction.
As part of efforts at stimulating the economy, government can make the necessary investment aimed to grow the industry. Enabling policies should also be put in place, leading to reducing high interest rate in order to encourage more people to embrace mortgage loans.
On account of the identified obstacles, many primary mortgage Banks (PMBs) are going through very difficult times such that some are not able to meet loan applications from home seekers.
“If government pays closer attention to the PMBs by removing some of the obstacles on their way such as the drawbacks of the Land Use Act of 1978 which rests land ownership rights on the state governors, the right to easily foreclose on delinquent borrowers, ease of creating a legal mortgage and perfecting titles and the ease of falling back on one’s collateral to recover bad loan etc, the industry will surely improve tremendously”, a mortgage operator argues.
The operator, who does not want to be named, insists that until all these issues are resolved in a way that encourages the provider of capital, in this case, the mortgage bank, to give out loans, the sector will not grow as desired.
He hopes that when these obstacles are removed, the multiplier effect of mortgage will allocate more funds towards the provision of home loans while home buyers will better appreciate the implication of prompt interest and capital repayments as well as ensure discipline on the part of the people.
Some finance experts argue that limiting a mortgage institution to a fixed capital base of, say N10 billion, is wrong because that amount is too meager; even N100 billion is also meager given the kind of projects they finance.
For this reason, the federal government needs to come in, look at what is happening in other civilized world and copy because, these days, “copying is no longer an act of deception but actually something that is done even in the civilized world”, says Okika Ekwem, a US-based realtor.
In such economies as US and UK, Ekwem says there is a secondary market for real estate financing where commercial banks or individual brokerage banks lend money to people and thereafter sell the securitized certificate to the secondary market and come back again to lend to individuals.
Mortgage industry growth that can impact the economy, according to Meckson Innocent Okoro, is possible if the Federal Mortgage Bank of Nigeria (FMBN) plays the role of a regulator while the federal government, through the CBN, should empower the PMBs.
To have a viable mortgage industry that can have significant impact on the economy, more PMBs have to be licensed such that there could be as many as 40 PMBs in each of the big cities, while each of the smaller cities could get as many as 10.
This is to discourage the concentration of these banks in urban centres and when this is done, access to housing finance will be increased. The PMBs must be positioned to champion the whole issue of affordable or social housing for the low income earners in the country.
Mortgage finance as it is today, is not particularly established as a structure and as it exists in developed economies. The culture of mortgage finance is just gradually catching on with Nigerians and mortgage is financed the same way as every other commercial financing.
It is curious that after the recapitalization and consolidation of the PMBs, Nigerians are yet to feel the impact in the economy. As at today, the interest rate as it is cannot mobilize the industry and the situation is such that even at 10 percent, the level of income in the country cannot still support mortgage growth.
At a time like this in when the economy and the financial system were highly regulated, there were different interest rates structure for different sectors of the economy and within that period, lending to the housing sector was as low as 7-8 percent which underscored the importance attached to the sector and the government needs to look into this.