Dead assets and mortgage-backed residential housing

Dead assets and mortgage-backed residential housing

The impact of Nigeria’s underdeveloped mortgage system is not only on individuals who cannot access housing loans, but also on most of the residential buildings in the country which are not in formal mortgage and are therefore ‘dead assets’ unfit for any banking transactions.  Though there are other factors, such as the Land Use Act, that contribute to most residential buildings not being in formal mortgage, high interest rate on mortgage loans is a major contributor.

The argument is common that if there is any sector of the Nigerian economy where government’s action or inaction retards growth, that sector is housing. The sector is largely underdeveloped because government has failed to come up with policies to grow the mortgage system which, in other jurisdictions, drives housing development and homeownership.

As a country of about 170 million people, the housing stock in the country is said to be a little above 10 million units; homeownership level is about 10 percent as against 92 in Singapore, while the housing demand-supply gap is estimated at 17 million units.

The reason for this poor housing situation is because, among other factors, there is no functional mortgage system and the slow growth of the sector is because of its relative newness such that many people don’t even understand why they should save their money in mortgage banks.

The bigger challenge in the slow growth of the mortgage sector is that over 90 percent of the few residential developments are not covered by any form of mortgage such that of the 10.7 million housing units in the country, 10 percent of which is self-built, only about 5 percent is in formal mortgage.

This means that effectively about 95 percent of home equity/savings in residential developments are ‘dead assets’. It is estimated that mortgage finance requirement for the country stands at between N30-50 trillion. This is a big problem, but at the same time, it is a huge opportunity for investors.

Many residential developments in Nigeria were built or bought without recourse to mortgage due to the many constraints that have to be overcome in securing the facility from mortgage institutions. These constraints are mainly regulatory, financial and operational.

Land ownership and management in this country is always encumbered by administrative difficulties, especially with the issuance of Governor’s Consent which is the most contentious component of the Land Use Act. Apart from poor land registry practices, compensation for land is based on ‘fair compensation’ which is, in turn, based on diverse interpretations.

There is absence of an overarching legal and regulatory framework for the housing industry.  Limited access to long term funding; lengthy, rigid and ineffective foreclosure procedures;  non-vibrancy of primary mortgage banks and low level of participation in the National Housing Fund (NHF) are some of the financial constraints buyers have to contend with.

Operational costs, reflected in high cost of housing developments such as building materials, land acquisition and transaction costs and reliance on expensive and conventional construction procedures coupled with inefficient land management and urban planning system also contribute to operational cost. Low level of infrastructure provision for housing units developed, skills shortage and insufficient capacity building are also part of the operational costs issues that need to be addressed.

Some experts argue that part of the reasons for the low mortgage facility for residential development is mortgage operators’ demand for equity contribution as prerequisite for mortgage loan. But industry operators say such contribution is necessary for a number of reasons including the need to protect depositors’ money; need to hedge against default; lack of sound data-base on Nigerians among others.

Equity contribution, they explain, is as fundamental to mortgage lending as it is to regular flow of income. Banks usually demand this from loan seekers because there are institutional and regulatory developments that are still lacking in the industry.

“We don’t have a sound data-base of Nigerians; the National ID Card is still struggling and foreclosure laws are still not strong,” says Toyin Banjo, a mortgage expert, who assures that if the banks had all the above issues resolved, they would give people mortgage based on their credit rating.

According to him, as financial intermediators, it is the responsibility of mortgage banks to protect depositor’s money, stressing that 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. And that thing they need to protect the loan is what comes as equity contribution. But as logical as its demand is, loan seekers see it as a major impediment to home ownership.

 

Chuka Uroko

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