Why must mortgage loan borrowers make equity contribution?

To many Nigerians, especially those looking for mortgage loans to buy, build or renovate their houses, the who of idea of equity contribution for loan advance, which they interpret to mean  ‘bring money to take money,’ is stranger than fiction.

As a matter of course, somebody looking for loan is one who does not have money to do what he wants the loan for. So, he finds it pretty difficult to come to terms with the idea of bringing part of the money you need in order for you to get the money you need.

But the mortgage market is structured in such a way that even when high interest rate, which is a big challenge, is removed from mortgage business, borrowers will still have some hurdles to cross and one of such hurdles is equity contribution.

Really, to the man on the street, the idea of equity contribution does not square up. He does not understand why somebody that is looking for money to borrow is required to bring money in order to get that money. The question he frequently asks is ‘why borrow if I had money to give?’

He wonders why somebody who wants to borrow N10 million, for instance, is required by the lender to bring upwards of N3 million in order to access the N10 million. He argues that if he had such money, he probably would not have gone for the loan in the first place.

But the lender, the person who gives out the money, thinks differently and so has an answer to give to the question.

 Mortgage loans are generally demanded and given for buying, building or renovating houses and when borrowers demand for this loan, they are required to bring about 30 percent of the loan amount they want as their equity contribution, depending however on the risk profile of the borrower.

Industry operators, however, say there are reasons for which they demand equity contribution. One of such reasons is to hedge against loan repayment default. Equity contribution, they say, is fundamental to mortgage lending just as regular flow of income is.

 Equity contribution is fundamental because there are institutional and regulatory developments that are still being expected in the industry. There is no sound data-base of Nigerians yet; the national ID Card remains largely unreliable and foreclosure laws are still not strong.

 All these issues, according to mortgage operators, have compelled mortgage banks to demand for equity contribution and they say that if they had all the above issues resolved, they would give people mortgage based on their credit rating.

 Because mortgage banks do financial intermediation, it is their responsibility to protect depositors’ money and for them to protect those deposits, they have to ask for something that would act as a back-up to the money they give out to borrowers.

 “If we had development funds, the kind of funds that we have in the manufacturing some sectors of the economy, where government gave out intervention fund over a period of 15 years at a single digit interest rate; if we had that kind of fund in the mortgage banking industry, it would be very helpful in a number of ways”, says a bank CEO who does not want to be mentioned.

 Another mortgage banker who also pleaded anonymity noted that “the banker and the borrower are in the same market in which case both suffer from the same problem; we should not forget that we are all trading in one commodity which is money, and the trading is done in such a way that you sell according to how you buy”.

 Another argument is that the credit banks have, including that of the mortgage institutions, is short term in nature. So, they can’t lend long term and they do business in an environment that is very costly.

 The federal government, through the CBN, should do something about high interest rate charged by both the commercial and mortgage banks if the housing demand-supply gap is to be bridged.

Elsewhere, there are special interest rates on loans to real estate and nothing stops Nigeria from doing the same. The relevant authorities should look critically into the whole issue of equity contribution demanded from home loan seekers, especially the low income earners who cannot afford such loans.

 Equity contribution is reason for the huge housing deficit and low home ownership level in Nigeria today. It could, perhaps, be reason too for the low performance of the Federal Mortgage Bank of Nigeria (FMBN) which has been operating since 1977 without much result.

The apex mortgage bank supervises the National Housing Fund (NHF) and is responsible for the disbursement of mortgage loans from contributors to the NHF. In over 40 years, it has approved mortgage loans for just 56,000 houses and has just about four million contributors from a 170 million population.