FEATURE ARTICLE

Chamberlain S. Peterside, Ph.DWednesday, July 20, 2005
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[email protected]
New York, NY, USA

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AMELIORATING HOUSING DEFICIT IN NIGERIA
...THE ROLE OF PRIMARY & SECONDARY MORTGAGE INSTITUTIONS AND THE CAPITAL MARKET


…Economic Growth-Driver.

he experience of all advanced countries proves that home-ownership is not only a means of satisfying the most basic human need – “shelter”, it is a proven economic growth driver as well as a tool for nurturing good citizenship. Research in the United States of America shows that 70%-80% of wealth accumulation by middle to low-income families is a direct result of home-ownership.


Anecdotal evidence suggest that in societies with high ratio of home-ownership, there is a lower crime rate, gainful employment opportunities, higher standard of living, more prosperity as people remain optimistic about their future. Home-ownership amongst all strata of population in most communities is often a strong motivation for hard work and being alive, in the United States that’s called the “American Dream”. The lower to middle income families around the world all aspire to this dream. Mostly thanks to a robust housing market, a devastating economic crisis was averted during the early 2000 in the face of falling US stock prices. The housing market accounts for about 20%-25% of Gross National Product (GNP) in most countries.

Nigeria’s drive toward “housing for all” has so far been an uphill task that seems more of an illusion than reality. Successive efforts to meet every set target have failed as housing deficit now stands at over 16 million units in Nigeria. Most urban dwellers in Nigeria today live in shanty-towns and dilapidated houses without basic amenities, unsanitary conditions or running water. Estimates show that Nigeria needs an average of 1 million housing units per year not only to replenish decaying housing stock, but also to meet rising demand.

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…Home-Ownership - Reality or Illusion.
The reason for such dismal conditions in the housing market is not far fetched. For the most part, everyone realizes the seriousness of the problem but not many can proffer realistic workable solution. With a population estimated at over 130 million and rising, it is practically impossible to provide affordable housing for middle and low income Nigerians who constitute the bulk of the population, without a viable long-term mortgage lending scheme.

A national housing policy has been in place for sometime now just as several primary mortgage institutions (PMI) have emerged in the last 15 years, either as independent entities or as subsidiaries of depositary institutions (commercial banks). At the last count there are over 32 Primary Mortgage Institutions in the country. Traditionally, both federal and state governments or even parastatals have dabbled into providing low cost housing for employees with limited success. The unfortunate reality is that a mortgage-lending scheme as we know it today in Nigeria, that is predicated on short-term loans in the face of rising inflation and high interest rate regime is grossly inadequate. The National Housing Fund (NHF) was created as a vehicle to mobilize savings and disburse loans to qualified low to middle income home-buyers.

Unfortunately, most of these loan facilities remain on the balance sheet of either the primary lending institution or Federal Mortgage Bank of Nigeria (FMBN) until maturity (fully repaid). Such a practice is not only inimical to the ability to expand credit and create liquidity but also imperils the lender.

…Overhaul - “Collaterization & Securitization”.
The current system calls for a total overhaul through the participation of existing institutions and application of innovative funding strategies. The experience of US is very instructive in this regard. The Federal National Mortgage Association (Fannie Mae) was established by President Franklin Roosevelt in 1938, after the great depression principally to address the unwillingness or inability of depositary and private mortgage institutions to extend loans to low income families.

According to its former Chairman Franklin Raines, over the past 60 years Fannie Mae has remained focused on this singular objective and successfully grown home-ownership to 67%. In the last 5 years the growth rate of home-ownership amongst blacks and minority population who constitute the bulk of low- income population has grown by over 200% to 49% of all households. Federal Home Loan Mortgage Corporation (Freddie Mac) is another major player in the secondary mortgage market. The ability of these two institutions to create liquidity, diversify risk and build confidence amongst primary lenders can't be over-emphasized and is the key to success.

Federal Mortgage Bank of Nigeria – FMBN (and even state governments) has no business being in the direct-lending arena or shouldn't be providing loan for civil servants to buy properties. Those funds should be rather channeled through PMI just as the cardinal focus should be to develop a strong secondary market that could guarantee mortgage loans and support the loan-origination ability of primary institutions by purchasing loans issued to home-buyers and then turn around to collaterize those loans by issuing Mortgage Backed Securities (Bonds) that could conveniently be sold in the capital market. By virtue of its statute, FMBN could muster federal government guarantee to back the loans.

Primary institutions can as well directly collaterize some of their loan portfolio by issuing Mortgage Backed Securities (MBS) or Real Estate Investment Trust (REIT) Bonds, and sold to individual/ institutional investors, thereby expanding credit and diluting risk. The capital market in Nigeria is currently very geared towards this objective and has the ability to efficiently distribute these instruments.

Management of Nigerian Stock Exchange (NSE) has mounted an aggressive drive to encourage fixed income instruments. The emergence of pension funds with huge investable assets is also a very timely development. In the post-consolidation era, banks will be deluged with assets and hard-pressed to find sufficient viable investment projects, MBS and REITS are some of the lucrative options where long-term capital could be deployed. If well packaged, real estate investment is tangible, has a stable cash flow/income stream and offers a predictable capital appreciation. Most of all, the huge pent-up demand for affordable housing in Nigeria is a tremendous investment opportunity waiting to be tapped.

The effort to provide affordable homes by state governments or the focus on high-end homes by few developers is bound to fizzle out as liquidity dries up. A sustained housing market will only thrive in a standardized mortgage lending environment, where lenders can cost-efficiently originate and service loans of longer duration and then “Securitize” the receivables in the capital market. Anything short of that will simply tantamount to spinning the wheels without any remarkable impact.

Elongated Indexed Mortgage (EIM) Loan scheme is one of such innovative programs, which our firm had recently developed, and collaborating with US institutions and local lenders such as Hallmark Homes Ltd to implement in the Nigerian market. To request additional information on this initiative send us e-mail at [email protected]_ (mailto:[email protected]) . During the upcoming International Infrastructure Finance Conference in Abuja, industry players – Stock Brokers, Bankers, Lawyers and Technocrats will be able to learn first-hand about the benefits of new investment instruments and how to package them based on global best practices.

Participants will learn what issues that should be considered prior to issuing these securities such as legal aspects, pricing, rating, tax ramifications and other key success factors. At the end of the event, attendees will leave with a better understanding of how to effectively structure/ market MBS and REITS to investing public.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.