NMRC: A Catalyst for Revamping the Nigerian mortgage industry
The Nigerian mortgage industry remains hugely untapped despite the immense opportunities inherent in the sector. Until the recent establishment of the Nigerian Mortgage Refinance Company (NMRC), conventional home mortgages were structured like typical loan finance transactions and had little or no impact in bridging the country’s huge housing deficit.
The NMRC was therefore set up to provide the necessary financial incentive to the mortgage industry with the key mandate of developing the primary and secondary mortgage market by providing access to long term funds.
Additionally, the NMRC model provides a leverage position for the Nigerian mortgage industry through the refinancing of existing and future financing obligations of mortgage lenders (i.e. deposit money banks and primary mortgage institutions) thereby enabling them to grant long term mortgage finance to their clients. This refinancing model anticipates a restructuring of the two crucial elements of the mortgage facility, the interest and the loan tenor. Despite the underlying benefits of the NMRC model, the important factors that will determine its level of impact and success towards creating a virile mortgage industry are identified and discussed below.
The Underwriting Standards
The NMRC has developed unique underwriting standards which introduces uniform eligibility criteria for mortgage lenders and forms the basic prerequisite for accessing NMRC funds. It is expected that the underwriting standards will engender efficiency and mitigation of finance risks. These standards stipulate inter alia, the minimum know-your-customer requirements for applicants, acceptable facility threshold and tenor, identity and professional status of home occupants, and minimum credit rating.
The underwriting standards has also made provision for the applicable methods for verification of means of repayment and minimum acceptable down payment (which ranges between 20% – 30% depending on the loan amount. A minimum of 30% – 50% down payment will apply to borrowers in the informal sector).
The major challenge with the underwriting standards will be level of compliance by mortgage lenders across board. Most of the existing mortgages within the portfolio of most PMI’s may not meet the underwriting standards due to their exposure to the informal sector. It is this writers view that despite the high appeal of the new mortgage regime, the informal sector may pose a challenge due to some of the constraints identified later below.
Title
Land title is often an area of grave concern in any mortgage financing transaction. Under the underwriting standards a first ranking perfected legal mortgage or a title perfection duration insurance cover not exceeding 18 months from closure of the mortgage, is a prerequisite to obtaining NMRC refinancing. The difficult land title registration process will test the ability of mortgage lenders to access the NMRC funding as they will be caught between the need to obtain first ranking perfected title in time to avail the NMRC refinance, or obtaining a title perfection duration insurance cover which invariably increase the cost of financing.
The mortgage sector requires a sound and reliable land registration system to ease smooth passage of title. By its nature, mortgage finance envisages a transient holding of title which necessitates transfer of title. Largely due to administrative bottleneck enhanced by the Land Use Act, registration of title remains an unresolved challenge to mortgage finance. The need for a an overhaul of the Land Use Act as well as deployment of technology in the registration of title cannot be overemphasised. Till date only a few states have implemented the use of the geographical information system which provides veritable solution to the out-dated time consuming manual process obtainable in many land registries.
Enforcement of Mortgagee’s rights
The right of a mortgagee are well established under the statute and the common law. These include the mortgagee’s right to recover money owed, right to sell the mortgaged property, to appoint a receiver or manager, right to enter possession and the right of foreclosure. These mortgagee’s rights are subject to the saying “once a mortgage always a mortgage” upon which the mortgagor’s equity of redemption is entrenched. Unless foreclosure has been concluded, every other right of the mortgagee fails upon invocation of mortgagor’s equity of redemption. In reality, the enforcement of mortgage is weakened as foreclosure, the mortgagee’s most potent power is blunted by the slow and inefficient judicial process.
Informal Sector
The informal sector do not appear to have been comprehensively covered under the underwriting standards which is largely modelled on formal business principles that envisage organised salary and income records of the borrower. Specifically, the underwriting standards require the borrower to maintain an active retirement savings account with a PENCOM approved pension fund administrator. This approach fundamentally disqualifies potential applicants from the informal sector which has a critical mass of suitably qualified mortgagors. It would be daunting task selling these formal concepts to a largely uneducated population.
Developing model mortgage law
The Land Use Act which canonised the Governor’s consent as a mandatory prerequisite for any legal transfer of interest in land has long been recognised as clog to commercial exploitation of land and real property. The prohibitive effect of the consent regime, the land title registration procedures of various states, and also the enforcement of mortgagee’s right of foreclosure militates against the evolution of an efficient land administration system. These myriad of issues reinforces the need for reform of the existing regulatory regime. A model mortgage law however provides a more pragmatic and less expensive option to a complete overhaul of the system through amendment of the Land Use Act and Constitution.
The model mortgage law would proffer viable options for an efficient system of mortgage registration and enforcement of mortgagee’s rights. The expectation is that such laws should canvass new approaches such as the introduction of alternative dispute resolution in resolving mortgage related disputes, creation of separate mortgage registry to coordinate and administer the registration of mortgages, and provide for simpler options for the creation and documentation of mortgages. The ultimate hope is that each state would enact its own model mortgage law or adopt the innovations they propose.
Conclusion
The NMRC provides a viable platform for the creation of a robust home mortgage system in Nigeria. Mortgage lenders have the opportunity to be able to provide long term mortgage finance at friendly interest rates. However, the success of the NMRC depends on its ability to innovate pragmatic systems of including the informal population into the formal mortgage system, the standardisation of the legal regime through the entrenchment of a model mortgage law across the states, and strengthening the enforcement of mortgagee’s right of foreclosure.