Like many other good ideas before it, implementation is a major challenge that close industry watchers say is already affecting the mortgage guarantee programme that has just been introduced.
As a new initiative by the Central Bank of Nigeria (CBN), the programme holds out hope for low income earners who, ordinarily, cannot take mortgage loan because it is unaffordable to them. This is why the delayed implementation of this programme is already raising concerns.
The programme is coming as a homeownership enabler. It is a kind of mortgage which is given to a borrower by a lender, where an identified third party will take responsibility for the loan if the borrower defaults. The programme is structured in such a way that once the borrower defaults, the third party receives a claim from the lender, pays the lender off, and assumes responsibility for the mortgage.
As such, mortgage guarantee products incentivise lenders to accept loans with lower down-payments, thus increasing affordability. With increased affordability, it means more people will be brought into the mortgage net, making more money available to more home seekers.
Besides incentivizing mortgage lenders, a quality mortgage guarantee programme is also used to provide credit loss protection to lenders in case of borrower’s default and, according to CBN officials, a robust primary mortgage market is a synergy of several components, all working together to effect affordability and access for intending buyers.
That homeownership level in Nigeria has remained low at less than 5 percent in the country, which is Africa’s largest economy, is explained more by absence of mortgage system than anything else.
The country has practically no process that supports housing development and homeownership unlike advanced societies such as England where there is a body called building society which subsidises mortgage and delivers same to home buyers either through banks or by itself.
A major problem with the mortgage system in Nigeria is accessibility and the second is clarity. When you approach mortgage banks for loan, they will begin to ask you for things that you cannot provide and so, mortgage is not accessible.
In terms of clarity, there is no unified system. It is obvious that there is no clarity in the mortgage system and if there is any such thing, it is not yet published and so people don’t know and, if people don’t know, it means such a process does not exist.
This is why the coming of mortgage guarantee products which exist in various forms, and are administered by different agencies are most welcome. Tokunbo Martins, director, Other Financial Institutions Supervision Department (OFISD) at CBN, explains that, “in most cases, the national government of the host country is the driver of any successful mortgage guarantee programme, which they administer either through a government agency, a private entity or a hybrid encompassing both types of entity”.
The highpoint of this programme as homeownership enabler lies in its numerous benefits. It is a product of great value to any housing market because it offers opportunity to both the supply and the demand sides of the mortgage market. It provides potential opportunity of lower down-payment for borrowers, while opening up a larger market for lenders who make the decision to finance the target population for the programme.
The importance of this programme in Nigeria cannot be over-emphasised given that Nigeria is a country where typical down-payment is over 20 percent, with extremely high additional costs for regularisation, titling and other home-buyer responsibilities.
“Mortgage guarantee in our market will also be used as a valuable tool to regularise and standardise the market in every area from documentation to underwriting to collateralisation and mortgage dispute resolution. These are major issues we need to resolve”, Martins noted in a paper she presented at a real estate forum in Abuja recently.
Continuing, she said, “One of the most important benefits of mortgage guarantee is that it has the capacity to encourage the influx of investor funds, both local and international, into the mortgage market. A well-executed mortgage guarantee programme provides comfort to intending investors by signaling the presence of standards in the industry that would likely reduce the risk of losing their invested funds”.
In addition to all these, the programme also ensures increased access to housing finance; access to higher amount mortgages; better loan rate terms; market standardisation and increased consumer literacy; more stable property values, and overall more stable and improved national housing sector leading to better economy.
It also ensures reduction of credit risk; expansion to new markets/deepening of existing markets; reduction in capital adequacy requirements; enhanced access to financing such as portfolio risk rating, refinancing and securitisation.
With all these in place, mortgages become more affordable to citizens; more people can meet their housing needs on their own; there will be financial system stability; more jobs and economic security for the citizens; better social inclusion and contentment for the citizens, and achievement of political and economic promises.
Like any other economic plan or policy, the programme which has proposed pilot project with Nigeria Mortgage Guarantee Company (NMGC) as special purpose vehicle (SPV) is not without constraints.
The project consultants, while cautiously optimistic about the viability of the project, have identified multiple constraints to its success and, according to the OFISD director, the biggest constraint is the 1978 Land Use Act.