How It Really Works – Mortgage Refinancing

Lagos State To Speed Up Land Titling And Governor’s Consent Processes
November 9, 2016
NMRC Joins Housing Stakeholders At NRCN Workshop
November 22, 2016

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Prof Charles Inyangete is the Managing Director/Chief Executive Officer, Nigeria Mortgage Refinance Company (NMRC). He tells The Interview about the housing financing sector and how the outfit is driving the process towards affordable home ownership for Nigerians through mortgage financing.

Why the NMRC at this time?

The NMRC is a critical aspect of really getting the mortgage to work in Nigeria. Our role as a secondary mortgage institution is to provide the liquidity that is needed by going to the capital market and raising funds, and making those funds available to our member banks for the refinancing of their mortgage portfolio.  So when we have done that, what we then provide is not just that liquidity; extending the tenure of the mortgages brings affordability closer to people. It also provides accessibility to mortgages and when all of those things fall together, you have a stable housing market. So, housing finance needs liquidity. It needs liquidity that makes affordability and accessibility a reality and that’s what NMRC is all about.

Why do you think the NMRC’s intervention is needed at this time?

This intervention actually goes back to at least two years.  It is very critical at this time because even when there is a bit of liquidity – which is really drying up – that liquidity is for a very short term; you don’t have long term liquidity. So, our ability to go to the capital market to raise 15, 20 and even beyond 20-year money is critical. It is when you extend the tenure, that’s when you make home ownership more affordable. For instance, if you have to pay for N5 million house for five years, you will be paying a million yearly, and note that I am ignoring the interest here. But if you extend that to 20 years, you will be paying N250,000 a year. So, that’s the analogy and, of course, you are paying interest, but the interest is paid over whatever period you have taken. The next challenge is to bring the interest rate down to single digit which is what every Nigerian wants.

You have been in operations for about two years now; what are the three most critical lessons you have learnt?

From the beneficiaries’ perspective, the first one is that Nigerians, first of all, do not understand enough about the mortgage market. And because of that lack of understanding of the mortgage market, they have not taken advantage of the opportunities that exist to the degree they should. So, we need a huge and persistent awareness campaign, which is what we are beginning to do.

The second important lesson is that, in this market, the movement can be very, very fast in terms of the underlying things that drive the market – the interest rate. So, our timing to go to market to raise funds is also very critical. The last time we missed by two weeks the time we had intended to because of the approvals we needed and those approvals cost us an added two per cent interest to the cost of the funds we raised, because our funds are based on the government rate as a base.

The third point is that we realized that, in the market itself, the expertise to understand the deepest things underlying the mortgage market is actually very limited. We need to also develop the skills of the practitioners.

The fourth is the absence of data. There is so little data to be able to take decisions in the housing market. That is critical to inform policy. Building an information portal will allow us to capture information. We are also building a market structure that is technology-based that will actually allow us to build the business. So, our business will now be able to link all our member institutions, our member banks to interface, and it will extend also to the market itself, to the people building for mortgages, to be able to put out information, to be able to get applications.

Successive governments have always talked about housing deficit, which has now been put at about 20 million. Do you think this government has what to takes to tackle the problem?

It is not my place to comment on the policy of the government but I do understand that the government has identified housing as a critical element of success for driving the economy. Think of the greater impact: housing creates construction jobs; housing creates growth in the economy that is often ignored because when you go to a construction sites, you are going to see so many that are feeding into it. There are supplies of materials and the labour that is taken. The housing stock in itself it is a stock of economic value. So, we should be able to measure things in terms new constructions that are done in addition to existing stock, new sales of new housing; all of these components of the economy are often ignored in our context, so we haven’t given housing the high priority it deserves. Just like every other key economy of the world, you would see that housing constitutes a very large portion of the GDP. In Nigeria it is very, very small.

Are there signs now that we are giving it that priority?

It is looking very promising. The NMRC, for one, is an indication of that and the fact that we are progressing. And driving the new thinking in the market using a partnership between the private and public sectors, I see new initiatives. Today, there was an announcement in the minister’s speech that points to the need to address the issue of driving the interest down to single digit, which is what people are looking for. We hear about support to really kick-start the sector in the form of supporting the construction industry. So, all of those are important parts and when those come together, we will see a seamless housing sector that is moving up.

With all these ongoing activities, how soon do you think we will begin to see results?

I think we are beginning to see results in the sense that because we now have a longer tenure opportunity of using these funds, we now see bigger transactions. In the NMRC, for example, we are looking at the next transaction size at N20bn compared to the previous one that was N8bn. So, when we go to the market – for which we are about finishing preparations – it would be for a much larger size bond issue and we will expect the size to keep increasing. That’s driven partly by the existing mortgages that have been created by our first activity and new mortgages to be created, as well as refinancing existing mortgages. So, when we go to the market, it has multiple impacts. The funds that we generate from bond issues are used to refinance existing mortgages, which in itself allows new mortgages to be created. In essence, you have refinancing of existing mortgages on the one hand and creation of new mortgages on the other. So you see the multiplier-effect going forward in the mortgage market. So when the construction side of the business is addressed, we will have more housing stocks but it needs to be addressed in a manner that matches the needs. We need to address affordable housing and it’s that addressing of affordable housing that kick-starts the real growth in this critical sector of the economy.

The present housing crisis, though highly undesirable, also presents immense prospects; do you think the relevant professionals are sufficiently availing themselves of these opportunities?

I see an even bigger opportunity. For me, the crisis of affordable housing that exists creates a level of inequality that is too high a price for us to pay, too high a price for an economy that wants to grow to pay. So, that price must translate into the opportunity that also exists. We must, from a developer’s perspective, ensure that there is funding of the kind that will allow houses to be built and delivered at affordable levels. It must also allow us to bring in new technology that allows construction to be done and we see that beginning to happen. Just last month, we saw a project of a thousand units commissioned and the technology being used is innovative to deliver more affordable housing. We need to see the funding of construction providing charges or costs that would translate to cheaper housing.

But do you see the private sector ready?

Oh, the private sector is always more active than it is given credit for. If there really is an opportunity and uptakers are there for housing, believe me, the private sector will come in. It is where they feel that the opportunities that are there are not clear, or that the risks are not easily quantifiable or understood, that’s when they will keep away. And at the moment, that is their perception. Foreclosure is an issue and that keeps away funding from construction because when it goes wrong, it’s difficult to foreclose. The other side of it is that we don’t have crystal clear mortgage laws. Even the registration of mortgages is not clear; it is convoluted. The governor’s consent is a problem and even when you combine that with the fact that you have a judicial process for foreclosure, it means you cannot have a basis for foreclosing, you have to resort to the courts; that’s a problem. If and when we have a structure that allows you to foreclose in crystal clear manner. Added to that, you also have a system that allows mortgages to be created almost seamlessly within a short time. It’s clear what you need to do and how long it will take. It will give more confidence and when you create more confidence in any group, you create this semblance for a sustainable and resilient market. A market that is not built around foundations that are clear, that people don’t understand, is built on very thin ground. You will find the flight of capital easily at the slightest signs of problems.

Apart from having a huge housing deficit, Nigeria is also one of those countries with the problem of substandard housing; what concrete steps are being taken to tackle this?

For us, when we refinance, we actually go back to the asset to have reviews of the asset to ensure that the quality and evaluations are up to our expectations. But that is after the event. What needs to be done is prior to the construction, to lay out the guidelines, and that, in my understanding, is what is being done now. Guidelines are being put forward for the kind of size of house you can build; that, I think, is a way forward. Also, we need to take a step back. Gone are the days when if you want to build affordable housing it means going 50km out of town, no. That’s just building something that’s not likely to be sustainable because the people who live there have long commute time, and affordability is measured also by the time it takes to get to where you are doing your business. So, if it is too far away, it ceases to be affordable; it takes too much time; it costs too much. The other thing is that infrastructure tends to be not available in those far-flung locations. So the new thinking of affordability that fits into the new matrix going forward is to build near where people can get to work, and make it something that can be sustainable. First of all, it’s durable because it now has a guideline on how it should be built.  It considers the need for commercial use, so you can have shops and offices around it. You can have hospitals and schools. So, it has a self-sustaining component built into it. You also build with the design and expectations of the people in mind. If people say they don’t want to live in a 20-storey building, there is no point building a 20-storey building because it will soon be neglected. We are beginning to see that coming up. There are pockets of projects, even here in Nigeria, that are beginning to address these needs.

Can mortgage banks operate outside your umbrella?

Oh yes, many mortgage banks are not members but several are.

So, there is no law mandating them to?

No, there is no law but for them to be refinanced through us, they have to be members. As we speak now, we are going out to the market for a second round of equity raise and we have received a lot of expressions of interest, but not just mortgage banks, we would like to have commercial banks.

We would like to see one key mortgage market in the country.  When all these things are together, you will have a market that’s sustainable.

How exactly do you execute your mandate?

You see, the value chain of housing is very critical. What we have done is to go back to the beginning of that, at that chain. For instance, we are looking at title; you need to have title to the land to be able to build on it. That’s why we are looking at the Model Mortgage and Foreclosure Law. It’s a matter of title so you can have title to your land. We are looking at construction because we are saying the houses need to be affordable but, without a title, whether affordable or not, you have nothing to fall back on. We are looking at the creation of mortgages that comes from those constructions that are coming. We are saying we’re ready to support housing finance entities – which is, mortgage banks – to give you mortgages even during the time construction is taking place. If you know for sure that you will collect your house in six months and the mortgage company is satisfied that your developer will deliver, they can issue you a mortgage so that on the day you receive your keys, we refinance them. You have assurance that you already have a mortgage because we are standing at the back to refinance.

You are one of the sponsors of the recently concluded housing conference; what exactly do you hope to achieve?

This conference is a major privilege for the NMRC to be able to partner with the African Union for Housing Fund to host the 32nd conference, which is on Housing and Africa’s Growth. It was critical that we had the opportunity of bringing the conference to Nigeria. When you think of what housing can do to diversify the economy of Nigeria from oil, it’s time to think that, given the privilege, we are able to draw the lessons of other countries and get our key policy makers to the opportunity to interact. And we have been privileged to have the minister of power, works and housing, and even though he wasn’t able to come, he sent his prepared speech which was delivered.

What role would the Federal Mortgage Bank of Nigeria (FMBN) be playing under the new dispensation?

First of all, the FMBN does something which we are not allowed to do, which is to originate mortgages; we don’t do that. Its funding source is different from ours. It has subvention that comes from the National Housing Fund; we don’t benefit from that. And so we have a continuum of market that goes from the very bottom end to the very top end and we can play in that space. We can refinance from as little as N1.5 million house up to a maximum of N50 million house. I don’t believe they actually have that sort of limitation. But they are also playing, maybe, with a concentration on the lower range of the market but there is room for both of our institutions and our roles are very clearly defined.

We know you don’t speak for the government but some major disincentives to investment in housing are the rigidity of the Land Use Act and regulatory obstacles in obtaining and perfecting legal titles. How does the NMRC hope to surmount these obstacles?

We recognize that land is a state matter, so the model mortgage and foreclosure law that we are pushing is being tackled from a state-based approach. We have approached governors of various states. We have signed MOUs with some states already and we are expecting to sign more with many more states, with a view of them implementing the Model Mortgage and Foreclosure Law. That would mean that we would see them as key investment destinations. We would say so wherever we go and that would allow people to recognize that mortgages are important. It will set the tone because, at end of the day, land is a state matter; it’s the governors that allocate land in their respective states. So, yes, we know there is a pragmatic solution that allows us to do our business.

What is the existing size of unserviceable loans that the existing mortgage institutions have to deal with?

When it comes to unserviceable loans, no one can give you accurate statistics and I will not want to give you misleading information. However, in our own portfolio, we have no non-performing loans; not even one on our portfolio. Our portfolio is fully performing. I know that some institutions, depending on their underwriting – do have problems of non-performing.

What steps have been taken to reduce this risk in future?

First of all is the way we refinance; we refinance with recourse that the risk is not on our balance sheet, it’s still on the balance sheet of the refinanced entity. That means that if you give us a loan that doesn’t perform, we hand it back to you. We have very high underwriting standard. We have what we call recourse as part of the agreement when we do business.

What exactly do you require an average Nigerian who needs a house to do in order to benefit from your services?

If you are at the point where you feel you are ready and now looking for a house that is built, we will tell you to go to one of our member banks so that they take you through the standardized evaluation which we’ve created as underwriting criteria.  Even when you are not able to pay the down payment which is a problem, we have introduced Collateral Replacement Indemnity; it stands in the stead of your 20 per cent deposit. Our member bank will inform you how you can benefit from that. With that you can have very little money paid down. They still evaluate you to make sure that you don’t buy a house that is too expensive for you. Once they give you a mortgage today, in six months we will refinance that loan. By law we are not allowed to refinance before you receive the key to the house, so the house has to be ready before we refinance.

What legacy do you hope to build?

By the time I am done, part of our commitment in our current strategic plan that will take us to 2019 is to grow the mortgage sector to up to three per cent of the GDP of the country and that will translate to in excess of 400,000 mortgages. Today, we have much less; we have less than 50,000 official mortgages in the system.

We want to build a mortgage market that’s understood with a clear structure; a mortgage market that is technology driven, that provides access to people; a mortgage market that will allow people to understand what mortgage is all about – the responsibility of home ownership using formalized funding; that’s the legacy.

When you are not thinking of creating mortgages and providing affordable housing, what else drives you?

I’m a man who loves nature. I’m also someone who enjoys cycling and also likes walking. I also enjoy the company of my family. I have two grown children who are just finishing university. My wife is an architect so we have to always talk about housing, designs and stuff like that.

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