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| Photo: fmbn.gov.ng |
By Olumide T. Agunbiade |Online
Editor
Nigerians were not
buying homes when rates were 18%, what happens now that rates have been
increased to over 20%?
Back In October 2011, the
Monetary Policy Committee (MPC) in an emergency session to bail the
depreciating currency, stabilize the naira and peg the inflation pressure;
announced the following rate changes: Monetary Policy Rate (MPR) was increased
by 275 basis points from 9.25% to 12%. The Central Bank of Nigeria (CBN) also
maintained the current symmetric corridor of +/-200 basis points around the
MPR. Also, the Cash Reserve Ratio (CRR) was increased from 4 to 8%.
Before seeking and
sampling the opinions of experts on these astronomical hikes, several questions
besieged my thoughts: Should the quest to save the naira be a singular reason
to hike? Did the MPC consider the impact on the real estate sector?
Was the timing right,
considering the fuel subsidy removal already generating heated debate? Does
saving the depreciating naira and foreign reserve have a huge economic impact
as to adjusting rates and fiscal measures to impact on agriculture and housing
market?
Increasing rates do not
make it any easier for homeowners to sell and for existing mortgage borrowers
to maintain their loan facility. But, how much will it hurt? Economists say,
mortgage loans are the quickest loan basket to get re-priced upwards in such
market conditions.
Today, Michael Brown, 35,
web designer, is drawing his retirement plans. Recently, he inspected and
planned to acquire a property on mortgage; near Eleko beach road, Lekki
Peninsula, close to the new Airport, new Seaport and the Free Trade Zone.
Before the hike, he
was at an advanced stage of securing N15million loan to purchase his dream home
at an interest rate of 18%. Now at 22%, he needs an additional N600, 000 in
order to qualify for a loan on the N15million home he plans to purchase. How
many first-time home buyers have access to that kind of money?
In Nigeria, there is no
mechanism for risk sharing that will encourage banks and other financial
institutions to extend loans to people at the lower income level. Yet, if loans
are less expensive and easier to qualify, then the property becomes more
liquid.
Also, the absence
of Credit Information Database [CID] that financial institutions provide
information to and can get the history of all information from-as available in
developed nations-ensured, Nigerian financial institutions settle for lending
to the rich.
Primary Financial
Institutions [PMIs] typically at the moment, offer equity loan rates of around
20%. In addition, the borrower will pay 2% management fee charged
quarterly, 20-30% home equity contribution, legal fee charged by the real
estate attorney recommended by the bank and all title registration fees
required by the State government.
It is alarming to note
that a mortgage of 20% accessed on a N80m home, will require
borrowers to pay the full amount of the property in interest alone in
4years, and the property still far from becoming their own.
Besides, a country that
currently operates on the culture of ‘cash and carry’ in all her activities can
only be dreaming of housing. ‘‘Until the nation sits up and rolls out a virile,
sustainable, non-elitist mortgage system, the housing situation in Nigeria will
remain comatose.’ says Mr. Bode Adediji, former President, Nigerian
Institution of Estate Surveyors and Valuers (NIESV) in an interview published
in ‘The Vanguard’.
The engine that drives
the economy of most advanced countries is mortgage and housing. The current
loan exposure of Primary Financial Institutions (PMIs) in Nigeria is about 1%
and the total contribution of housing, property and construction to the GDP
about 3%.
According to the
Managing Director, Federal Mortgage Bank of Nigeria (FMBN), Gimba Y’au Kumo,
the inability of the CBN to pay its equity contribution into the National
Housing Fund is responsible for the apex mortgage bank’s inability to either
provide the housing needs of Nigerians or mortgage for people to build their
own homes.
Is there a way out? Yes.
If the government will provide guarantees in form of mortgage insurance
to lenders for loans granted to first time buyers with no credit history
and low to middle income earners once such mortgage loans meet prescribed
underwriting standards. In the event of default, the government indemnifies the
lenders to a prescribed level.
The current situation in
Nigeria is similar to what was prevalent in United States of America until the
Roosevelt Administration (1933-1945) established the Federal Housing
Administration (FHA) to provide insurance against mortgage defaults.
Before the recession, the
U.S housing finance system is used as the model for most emerging mortgage
markets. Hence, government should start thinking of re-organizing the Nigerian
Federal Housing Authority (FDA) into a government sponsored mortgage insurance
institution that will provide this service.
Also, such insurance will
guarantee mortgage lenders some level of comfort and will encourage them to
extend the loans for longer periods to low and middle income earners. In
providing liquidity, such insured mortgages may be securitized, that is, pooled
by the Federal Mortgage Bank of Nigeria [FMBN] and sold in the domestic Capital
Market to interested investors.
In addition, the Capital
Market can be a good source of providing long-term funds through the issuances
of bonds and other financial instruments to finance infrastructural projects,
compared to the current method of funding through annual budgets which results
in having several uncompleted projects when revenues fall short of expectation,
as has been the experience in the nation’s history.
Indeed, the hike will
certainly affect the availability of capital, the demand for properties and the
accessibility of loans. Though some analyst believes the hike will not affect
the market.
Besides, in order to find
and adopt a realistic exchange rate for the naira, the CBN should as a matter
of deliberate policy continue on a gradual systematic devaluation of the naira
and pay its equity contribution into the National Housing Fund to enable FMBN
to either provide the housing needs of Nigerians or mortgage for people to
build their own homes.
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