She shares her insights into this meaningful product that is designed to address the pre-financing challenges currently faced by mortgage banks. Given the 6-month minimum seasoning period required before mortgages can be refinanced by the Nigerian Mortgage Refinancing Company (NMRC), the introduction of this short-term funding solution suggests positive progress in Nigeria’s real estate sector.
Truly understanding this product requires taking a step back to comprehend why the Nigerian Mortgage Refinancing Company (NMRC) was established in the first place. NMRC was formed to address both the timing and asset to liability mismatch issues that exists in the Nigeria housing finance industry.
To put it simply, housing by nature is a long-term asset that in turn requires corresponding long-term financing liabilities or mortgages; preferably between 15-20 years or more. In Nigeria however, this match between long-term assets (a home) and long-term liabilities (a mortgage) did not exist. Rather only short-term mortgages of 5-7 years or even less terms were available to potential homebuyers. The resulting mismatch in the asset to loan tenures created a gap in the industry which NMRC was to help bridge.
The NMRC was established to provide up to 20-year loans to its Member Mortgage Banks (MMBs). These MMBs then use these loans to refinance qualified mortgages between 5 to 50 million NGN already on their books. In this manner, NMRC helps mortgage banks to better manage their balance sheet duration risk by matching their assets to their liabilities, effectively creating a viable first-time mortgage industry in Nigeria.
In 2015, NMRC launched its first bond issuance with an 8 billion naira bond. Soon after its first series of refinancing with the MMBs, two key challenges were identified. First was the minimum 6-months mortgage loan seasoning period required for NMRC refinancing. This seasoning period is extremely important as the historical loss curve for mortgages is generally front-ended and with NMRC being a secondary mortgage institution, it’s important that some history of the mortgage loan is obtained prior to refinancing – same goes for all asset securitisations.
The second problem was the lack of liquidity for MMBs to continue to originate mortgages themselves. By the time MMBs were seeking to originate new mortgages, they faced the liquidity hurdle. Unlike the commercial banks, which could utilise deposits to establish loan liabilities to be converted to assets, the MMBs do not have ample access to this general source of financing. It is also against the Central Bank of Nigeria’s (CBN) regulation for MMBs to look to NMRC to fulfil their pre-financing as well as their re-financing requirements. As mentioned earlier, NMRC is a secondary financing or refinancing institution similar to a Fannie Mae in the US which also cannot fund homeowners directly.
The rise of Mortgage Warehouse Funding Ltd
This limitation in terms of timing and liquidity is what has given rise to the newly launched vehicle – the Mortgage Warehouse Funding Ltd. The objective of the MWFL is to provide short-term, economically viable pre-financing to MMBs across Nigeria. MWFL effectively sits between the MMBs and the NMRC.
Basically, it works like this: MWFL NMRC 0- 6months and 15 – 20yrs
•MMBs underwrite the mortgages to homeowners for 15-20 years.
•To raise the funding, MMBs then send the homeowner’s files to MWFL and subsequently to NMRC for short-term and long-term financing.
•Short-term (0-6 months): MWFL reviews the files and upon approval, provides short-term funding to MMBs with the expectation to be reimbursed in approx. 6-9months.
Long-term (up to 20yrs): NMRC in the meantime reviews the same file and waits 6 months to see if the homeowner makes their monthly payment to qualify for refinancing. After the 6-month wait, NMRC then refinances the mortgage. This means that NMRC takes over the loan obligation from MWFL. The MMBs then pays off MWFL’s short-term financing and, in exchange, obtains NMRC’s long-term financing option – a true match between long-term assets (mortgages) and long-term liabilities (NMRC Loans).
An immediate multiplier impact of the MWFL is in the construction financing space. Most commercial banks have been unwilling to provide phased construction financing to developers due to the speculative nature of their projects. With the pre-financing and refinancing issues addressed, MMBs can now partner with developers to fulfil the off-takers demands from the banks.
Basically, the MMBs can select which developments and construction teams fulfil their mortgage requirements and in turn the developers can use the backing of these mortgages to raise construction financing from the commercial banks. The solution is summed up perfectly by Sonnie Ayere, the Chairman of MWFL: “MWFL is the catalyst that gives developers the ability to build as they will now have solid off-takers to present to the commercial banks due to the increased mortgage financing capacity.”
The launch of the MWFL is positive progress on the journey towards establishing a viable mortgage industry in Nigeria. With a current housing shortfall of over 17 million, a growing population and a recovering economy, innovations such as MWFL will have a far-reaching positive socio-economic impact on the economy and populace as a whole.