How beneficial is mortgage guarantee programme for low income home seekers?
It is always amazing how quickly the euphoria and expectations that greet any new initiative in Nigeria die down just a few months after the announcement, introduction or launch of such initiative.
The mortgage industry in the country seems to be the most active in Africa in terms of products and programmes launch which includes the National Housing Fund (NHF), Nigerian Mortgage Refinance Company (NMRC), Mortgage Guarantee Programme, plus smaller initiatives by the primary mortgage banks (PMBs), yet it has all been motion without movement.
The industry is fraught with problems and challenges arising from environmental to institutional and governmental lapses, actions or inactions and, one way or another, these are impacting negatively on housing supply, demand and ownership.
Experts are of the view that homeownership level has remained low at less than 5 percent in Nigeria, Africa’s largest economy, due more to the absence of a functional mortgage system than anything else.
The country has practically no process that supports housing development and homeownership unlike advanced societies such as UK and US where there are bodies such as the building society in England which subsidises mortgage and delivers same to home buyers either through banks or by themselves.
Mortgage sector stakeholders in Nigeria including the central government, have tinkered with many ideas, policies and programmes aimed to grow the sector and make mortgage loans readily available to those who need them. But result is hardly seen.
A major problem with the mortgage system in Nigeria is accessibility and the second one is clarity. When a borrower approaches a mortgage bank for loan, the bank will begin to make impossible demands, asking him for things that he cannot provide which, for him, makes mortgage inaccessible.
In terms of clarity, there is no unified system. It is obvious that there is no clarity in the mortgage system here and if there is any such thing, it is not yet published and so people don’t know about it and, if people don’t know, it means such a process does not exist.
Currently, a new initiative known as the Mortgage Guarantee Programme has been launched by the Central Bank of Nigeria (CBN) and apparently, it holds out hope for low income earners who ordinarily cannot take mortgage loan because it is unaffordable to them.
The programme is coming with some benefits 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 incentivize lenders to accept loans with lower down-payments, thus increasing affordability. With increased affordability, more people will be brought into the mortgage net, making more money available to more home seekers.
It is hard to see how beneficial this programme is to low income earners. Even if it is, the industry is yet to see a guarantor for a low income earner seeking mortgage loan and the number that wants loan facilities is unimaginable.
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.
Mortgage guarantee products exist in various forms, and are administered by different agencies. 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 programme may, however, have its highpoint as homeownership enabler which lies in its numerous benefits. It is a product of great value to any housing market because it is an opportunity for 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-emphasized in a country where typical down-payment is over 20 percent, with extremely high additional costs for regularization, titling and other home-buyer responsibilities.
“Mortgage guarantee in our market will also be used as a valuable tool to regularize and standardize the market in every area from documentation to underwriting to collateralization and mortgage dispute resolution. These are major issues we need to resolve”, Martins noted.
“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”, he disclosed.
In addition to all these, the programme also ensures increased access to housing finance; access to higher amount mortgages; better loan terms of rate, term etc; market standardization 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; enhances access to financing such as portfolio risk rating, refinancing, securitization.
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 the 1978 Land Use Act.
Chuka Uroko