PROPERTY ARTICLES

The government must fund the mortgage sector, says MAKANJUOLA OJEWUMI, an estate surveyor and valuer in this piece. He argued that the involvement of a wide spectrum of stakeholders and overhaul of some policies will make the citizens to own their homes with less stress.

NIGERIA'S present housing finance system is severely underdeveloped and ill-equipped to mobilise and channel savings to the housing sector.

Although a Federal Mortgage Bank has been created to essentially serve, as a wholesale and apex institution, the other institutional components of finance market in terms of primary mortgage institutions (such as Building Societies, Housing Associations, Credit Unions, Housing Co-operatives, etc) have not developed, thus the Federal Mortgage Bank has concentrated largely on retail functions of lending to individuals.

From the commencement of its operations in 1977 to date, the Federal Mortgage Bank has granted loans valued at N442.6 million to only eight thousand, eight hundred and seventy-four (8,874) Nigerians. On the whole, the bank has concentrated its operations on social loans, which account for about ninety per cent (90 per cent) of its total portfolio while wholesale lending to housing corporations and estate developers constituted only ten per cent (10 per cent).

The bank's lending practice does not favour low-income household. As such, ninety three per cent (93 per cent) of loans granted to individual mortgagors has gone to middle and upper income households. Thus, in effect, the objective of assisting low-income group to own houses through subsidised mortgage loans has not been realised.

The NHF was created by Decree No.3 of 1992 with an expectation that it will drive the much needed financing for housing to be deposited in a large "purse" with the FMBN to be managed for long term funding for housing. Its major provision was a mandatory tax based system where workers (employees of both public and private sectors) were expected to contribute 21/2 per cent of their basic salary tot he NHF at 40 per cent per annum till they qualify or become eligible for a mortgage loan.

By this decree the fund was expected to provide a source of funds for building, purchasing and improvement of residential houses in Nigeria that will consider all Nigerian citizenry especially the low-income workers.

Banks are also expected to contribute an amount equal to 10 per cent of overall loans and advances for use in NHF while insurance companies were expected to invest 20 per cent and 10 per cent of their life and non-life premium into NHF.

The Federal Government was equally mandated to make financial contributions for long term housing loans. The fund as at 2008 had a total contribution of about N37 billion. Unfortunately the majority of contributions have come from mandatory deductions of salaries of public workers.

A good proportion of workers in the informal economy of Nigerian are not registered at all while the Federal Government, commercial banks, insurance companies have never complied with the directives given in the NHF. Part of the criticism is that the Central Bank of Nigeria has never wielded the "big stick" to enforce the provisions of the NHF upon these various institutions to ensure the flow of much needed funds for Housing Finance as initially envisaged.

The challenges

Against the backdrop of housing legislation, regulations and institutions on ground expected to create a viable environment for mortgage loans origination for Nigerians to build homes, available statistics and evidence indicated that there are several challenges hindering significant progress in housing delivery. Not enough impact is being made through existing policy to generate affordable mortgage loans to enable significant number of houses to be constructed either by owner-occupiers for purchase. For example, in 1994, the National Housing Programme set a goal of producing 121,000 housing units nation-wide. This figure is low compared with estimated housing shortfall for Nigeria in 1991 modestly put at five million.

While housing supply gap has widened and the nation now needs about 14 million housing units (UN Estimates), it is obvious that the goal of adding 121,000 units to our housing stock was not accomplished. As at 2006 the FMBN has approved for disbursement a total of N26.5 billion to construct 13,132 houses through estate developers across Nigeria. Despite this post-reform "feat" of funding real estate developers to produce over 13,000 houses, most of who are members of REDAN, the figure is a far cry from actual need.

There are several challenges constantly hindering mortgage policy from meeting set goals and objectives of government and policy makers, who hope that average Nigerians would build houses through easy access to mortgage loans in a fairly easy sustainable way.

A tax-based funding system

After several years of administering the National Housing Fund by the Federal Mortgage Bank of Nigeria, it has become obvious that the mandatory contribution of 2.5 per cent of basic wages is inadequate to fund mortgage loans for all contributors. Total NHF contributions stood at N5.8 billion from 1.8 million contributors in 2000. Total number of contributors stood at 2,876,787 in 2006 and cumulative funds to date is still under N40 billion.

Of this sum over N26.5 billion has been committed as estate development loans for active construction of houses to allow mortgage applicants have house to buy as the houses were hitherto unavailable. The remainder is what is then shared among mortgage applicants as loans to enable them build or buy houses. In terms of ratio, only 1 out of 2000 applicants has been able to access a mortgage loan.

Tax based mortgage system often face similar challenges and in review of successful experiences in other countries of the world, capital market based systems (mortgage backed securities) tend to be more robust giving more people the opportunity to access loans simultaneously and has proven to lead to sustainable mortgage loan origination.

A need to-engineer primary mortgage institutions

Accessing a mortgage from building a home is still an unclear exercise to many Nigerians. The establishment of Primary Mortgage Institutions by Decree 53 of 1989 combined with the provisions and guidelines of the National Housing Policy of 1991 has led to current practice in the mortgage sector. It has similarly moulded the type of mortgage products that are available subject to macro-economic variables within the Nigerian economy.

In other words, whether the argument is that the Federal Mortgage Bank of does not approve NHF loan applications with dispatch as they are forwarded by PMIs: or they do not sanction non-performing or fraudulent PMIs, who do not make timely returns of monthly contributions received for the NHF by Nigerian workers, who save up for a mortgage through various PMI accounts, the FMBN remains the apex mortgage institution and continues to operate in such capacity.

As a result, the existence and performance of Primary Mortgage Institutions through the years appears chequered. By 1995, there were 280 Primary Mortgage Institutions in Nigeria registered by private entrepreneurs. This number had declined sharply by year 2000 to 195 PMIs. Of these, only 74 were recorded as sending regular returns to FMBN. 120 PMIs have since become dormant and insolvent. Today less than 50 PMIs are operating actively.

Geographically, PMIs are not well spread with majority of the active ones concentrating their head offices between Lagos and Abuja FCT being areas of high property values and booming markets. This means that other parts of the country are left out of possible benefits of much needed housing finance.

Available statistics and information indicates that the supply of credit by FMBN is grossly inadequate to meet growing demand. The FBMN admits this too. The NHF has since inception operated as a housing tax fund and has not worked to produce enough loans for qualified beneficiaries.

Unfortunately, instead of Primary Mortgage Institutions to recognise this shortfall as an opportunity to create sustainable products by going to the capital market, several of them became distracted to create sustainable products by going to the capital market, several of them became distracted from their core-operations and went after short term funds in competition with the finance houses and commercial banks.

The result was a deepening mortgage crisis where loans were totally unavailable and a high failure rate among PMIs. The other result is that the average Nigerian was not benefiting from mortgage policy and houses were not built!

Entry of commercial banks poses new challenges

Gradually since 2004, after the CBN - Banks consolidation, Primary Mortgage Institutions have been broadened as several of the 24 commercial banks in Nigeria went ahead to create mortgage arms in their business. The acute need for housing has become more obvious and a growing middle-class with the right demographics makes it viable for commercial banks to allocate substantial sums to the housing sector from depositors' funds.

By design the NHF loans has been engineered to be given out, as a low interest rate of 6 per cent repayable over a maximum period of 30 years. The maximum loan approvable was N500,000.00 from 1992. It was increased to N1,500,000.00 in 1998 to reflect current realistic construction cost of a basic housing unit for an average Nigerian and later increased after the 2002 reform to a maximum of N5 million. Appropriately tagged "social mortgages" these loans are just not available for the asking.

Commercial banks therefore began to offer alternative funding. Relatively easier to access but on different terms and conditions. Unfortunately most average or middle-class Nigerians shy away from taking these mortgage loans. It cannot realistically work for the middle-income Nigerian.

The interest rates are at an average of 23 per cent to 27 per cent. Tenor is short with a repayment period ranging between 2-5 years (in some instances 8-10 years) and equity contribution very high between 25 per cent to 30 per cent. As if to underscore, real estate developers focusing on the high-end luxury market between Lagos and Abuja are able to secure loan facilities in commercial banks. Similarly a few high net-worth individuals purchase houses using these facilities but substantial progress has not been made even with this development.

These loans are not an alternative to the much-needed NHF loans.

Shortcoming in access to land and developers

The problems experienced over the years in an attempt to create a viable mortgage system in Nigeria often times points out the gaps in existing mortgage policy documents. For instance, at the time of reform in 2002, it became obvious that even if loans were available, there were not enough houses in the market available for purchase. This led to the creation of REDAN - Real Estate Developers Association of Nigeria.

The easy entry nature of membership meant that non-professional developers could go into real development. What then happens is a myriad of problems that range from faulty land acquisition processes to poor construction standards and inefficient delivery time. Most of these are avoidable if mortgage policy spelt out the qualifications of real estate developers and basic construction standards that must be met. These are on-going challenges that require solutions to mitigate against poor housing delivery and policy should reflect such.

An equally unclear aspect of mortgage policy intervention is the fact that successive policy documents have not done much to make access to titled land easy and straight forward. The effects of this problem are well known and not lost on policy makers. There is a bill before the National Assembly to change land tenure procedure and the provisions of the Land Use Act of 1978 and make access to titled land easier.

Unfortunately, the National Assembly has not attached any urgency to passing such vital legislation. Difficulty of access to titled land makes it more difficult for financial institutions to accept landed property, as collateral for much needed real estate development loans. At the same time, it exposes the developer to all sorts of misdemeanour from land owning families who want to challenge them while working on site, often leading to delays in construction of houses. Recommendations

• Based on the fore-going, government should carry-out a review of existing laws and policy guiding Housing Finance and come up with a well defined mortgage policy document adapted to work in Nigeria with the lessons learnt over the past 32 years since FMBN's inception to present date.
  
  There is enough knowledge if government is transparent, not to repeat past errors in forging the way ahead. This is a pragmatic approach that will correct all the errors of the past and allow various stakeholders bring their experience on board.
  
  
• The Federal Government must inject significant sums to fund a vibrant mortgage system for Nigeria. Government intervention will be needed at the beginning to ensure that credit is available. These must be done putting the right foreclosure system, review legislation that will enable houses to be repossessed and ensure all regulatory functions are in place.
  
  Within a few years, the mortgage system will take on a life of its own and allow others to obtain mortgage loans as long as previous borrowers are repaying. A good proportion of earnings from crude oil tagged: "Excess Crude Account" could be channelled by the Federal Government instead of channelling it to the three-tiers of government as often done.
  
  
• The land tenure system must be corrected and access to land title documentation made easy and straightforward. There is too much talk and propaganda around this issue. Since land reform is part of the Yar'Adua's Administration's seven-point Agenda, this government must develop the will to do it.
  
  
• Macro-economic policy must recognise that loans given out by the commercial banks must be at realistic interest rates and long tenor unlike what presently obtains. Central Bank of Nigeria intervention must recognise Housing as a critical sector.
  
  
• The capital market should be prepared to issue out unit trusts securities, Real Estate Investment Trusts, Mortgage Backed Securities that will generate significant funding for mortgage loan origination. There is too much talk around this without required commitment. If this was the direction of growth of the Nigerian Stock Market it is doubtful that it would have crashed the way it did in 2008.