Mortgage Sturves: A Conversation

Lepa, how far?

I’ve actually put on some weight…

Abeg no kill me with laugh. Anyway, I dey watch the launch of one mortgage sturves for TV yesterday. E be like say na serious thing because everybody for government dey there. 

Yes, it was the launch of the Nigeria Mortgage Refinance Company (NMRC). It’s quite a big deal because it can be a truly er, transformative policy of the Jonathan administration and for future governments.

E be like say anytime wey I come here, for your mind you believe say I no get work. Abeg groove dey tonight so talk quick quick, wetin be the koko of this thing? And how person fit take align? 

Well, the problem is a straightforward one – Nigerians need lots and lots of affordable houses (estimated at 17 million units) but currently there just isn’t any way for them to buy houses other than buying land and building the houses outright. In most advanced countries, you buy a house with a mortgage and spread the payments out over 20 to 30 years. So what you would normally pay as rent will go towards owning your own house.

But in Nigeria, it is estimated that there have been less than 100,000 mortgage transactions since 1960 because it is simply too difficult to get one for many reasons including land laws, identification problems and general economic stability. However the biggest problem with mortgages in Nigeria is that there is no long-term money i.e unless you are the government, it is difficult to find anyone to lend you money for the 20 – 30 years that is required for a typical mortgage. This is the specific problem that the NMRC is planning to solve.

But sebi we don get Federal Mortgage Bank from time? How this NMRC own take be? Na another office wey we go dey go queue dey beg people make dem give us loan? 

No, this is going to work differently. For starters, the government is only going to own a maximum of 20% of the NMRC so its going to be predominantly owned and managed by the private sector.

That one na bank na? Abi wetin government own go be if na private people get am?

The difference is that government is providing a guarantee to the NMRC. So even though it is not owned by government, private investors can be confident that if anything or everything goes wrong, the government will step in to keep the show on the road. The effect of this is that the investors can confidently invest in a lower risk and long-term vehicle for the sole purpose of increasing the number of mortgages and houses in Nigeria.

You dey talk, I dey hear but I still never understand…

The best way to think of this is to imagine a market where the product being sold is mortgages. All the banks in Nigeria are currently retailers which means they sell the mortgages they have and when they run out of ‘stock’ they cant sell anymore. The NMRC is however going to enter the market as a wholesaler. So it will sell wholesale mortgages to the banks who will then sell them to you the homeowner.

So I no go need to go their office go collect my mortgage?

No, in theory you will continue to apply for mortgages the same way you do now but where a bank would normally reject you for a mortgage and charge you something like 24%, they should now be more willing to lend you money and at cheaper rates.

Hmmm… Naija banks sha. My sister husband collect mortgage last year. Dem don write am letter to increase the monthly payment 3 times since dem sign the agreement. On top say dem force the guy make e transfer him salary account to them. Me I don tell dem say dem never collect mortgage sha. This one wey dem dey do na slavery

Yes, things are quite difficult at the moment and anyone who has taken a mortgage in recent times is a real hero. But the reason why they are increasing your sister’s mortgage everytime is because the bank funded the mortgage with short-term loans which means that everytime the bank has to refinance the original amount and costs increase, they have to pass it on to your sister.

The NMRC will solve this problem by making long-term money available to the banks to lend to the public as mortgages. First of all, the World Bank has given the government a $275m loan at zero percent interest for 40 years. Then it is also raising N6bn in equity from private investors. This is before it goes to the bond markets to raise around N50bn at roughly 12% interest. You can already see that when you combine these various sources of funding, the interest rates on mortgages in Nigeria will come down significantly from the current 18-24% range.

Like how much you feel say the interest go come be? If my sister husband hear this one, the guy fit give my sister belle on top excitement. The guy mortgage dey wear am like shirt as we dey talk

It’s hard to tell but I think we can safely guess that rates will be lower than 15% at the very most.

So you talk say NMRC go be wholesaler. How dat one go take operate?

Like I said earlier, the banks will continue to write mortgages in the normal way. So this means they will verify your identity and income and everything else to determine you are credit worthy. Then let’s say you find a house you want to buy for N10m and you have N2m of your own money to put down as a deposit, the bank will lend you N8m for say 20 years at 14% interest.

The NMRC then steps in after this – the bank will be able to sell 85% of that loan i.e. N6.8m to the NMRC. What this means is that rather than the bank waiting 20 years for you to repay the loan, they then have that N6.8m to lend to someone else almost immediately. You will continue to make your monthly payments as normal but the bank will now pass your payments on to the NMRC who now own your loan.

Taking the analogy further, previously if the bank had N50m to lend to 5 home buyers at N10m each, in theory it would have exhausted its funds. But now it will have a further N43m (85% of N50m) to lend to another 4 borrowers and then another N37m to say another 4 people. And so on…you get the gist. So as long as the bank is able to write the mortgage, the NMRC will be able to buy it from them and increase liquidity in the market. So that original N50m might fund mortgages for 20 people instead of the previous 5 people. This is a very simple assumption but in theory this is how it will work.

Going back to your sister’s husband, the fact that NMRC can borrow long term will mean that hopefully, their mortgage payments will stop increasing and changing randomly. Now you may be able to have constant predictable payments for 2 or 5 years even.

Hmmm….so mortgage go plenty pass as e dey now. E come remain the house wey people go buy…

Yes, that’s the other side of the equation. The government is betting that by increasing the demand side i.e. making mortgages more available, the supply of houses will increase to meet the demand. So when developers know that they will be able to sell their completed houses within say 6 months, they will be able to get loans from the banks (who also know what the demand for mortgages is) to fund the development of houses.

But how dem wan take do all our land wahala for Nigeria? Because na Governors get all the power when we dey talk land matter

That’s a good question. I think the government has adopted a pragmatic solution

Wetin be pragmatic?

There’s no way the government can get a land reform bill passed anytime soon and this is critical to ensuring that houses are built for the mortgages to come. So what they have done is to start the programme with 14 pilot states where the governors have agreed to cooperate with the housebuilding objective by fast tracking things like CofO and all the documentation required for building a house.

I guess the government is hoping that if the programme is successful in those 14 states with a lot of houses being built (and creating jobs), it wont have to beg the remaining 22 state governors before they also make similar agreements. So we might get some kind of quasi land reform without actually doing the hard work of changing the law. This is of course assuming that mortgages become popular in Nigeria.

So where Nigeria get this kind idea from?

It’s loosely modelled after America’s Federal National Mortgage Association better known as Fannie Mae

Haaaaa…. I don hear that name before o. No be dem put fire for America economy for that 2007 abi na 2008 wahala?

Yes a lot of the problems from the Great Recession started at Fannie Mae because it turned out that a lot of the mortgages they were buying from the banks and mortgage lenders were bad i.e. the people who owned the properties were not properly checked to ensure credit worthiness so they started defaulting on their loans and Fannie Mae got into trouble.

So that kind yawa don sure for Nigeria? When the thing go start make I know as I go take arrange myself?

One of the things that caused the problems in America was that banks had an incentive to write so many mortgages since Fannie Mae (and Freddie Mac) would buy them off them anyway. This led to a kind of frenzy where everyone was going crazy and building so many houses beyond even what was really needed.

In Nigeria’s case, we are so far behind in terms of housing and mortgages that it’s going to take a while for us to get to that kind of point where the market completely crashes and takes down the economy with it. Having said that, this is not an excuse for complacency; real estate crashes are very common as a root cause of many economic crashes. Our fellow MINT country, Indonesia for example, suffered a devastating economic crisis in 1997 that started when banks started to make crazy real estate loans. By the time the economy exploded, 15 million people lost their jobs and the economy shrank by 20%. 50 banks were closed with a further 38 being nationalised. In fact, it was only in 2005 that the Indonesian economy managed to reach the GDP level it was in 1996 after it had to be bailed out with $23bn from the IMF. There is something about real estate in an economy that makes it prone to overheating and general misbehaviour by a lot of people.

We will have to make sure that banks and mortgage lenders are doing their jobs properly i.e. ensuring that they take account of lending risks properly before passing on the mortgages to NMRC. We will also have to ensure that the money is actually used for mortgages because some people might be tempted to pull a fast one with the cheap money and divert it to something else. Also, we will need to make sure housebuilding is not concentrated in the ‘luxury’ end while ignoring the affordable side of the equation needed to house as many people as possible.

O boy! You sure say this thing worth am so? I dey alright like this o and I no dey sleep outside. Make we just dey manage ourselves dey go…

Housing is a problem worth solving. For one, it will create a lot of jobs. It also lets people have a stake in the economy which has a way of reducing crime. When people own their own homes, they tend to look after their neighbourhood a bit better. So it can help to solve some social problems that are currently plaguing us.

Another thing is that it should help with better planned communities. If people start buying houses with mortgages, it should reduce the practice where people just buy land somewhere and build their house. Instead we will hopefully have houses built in communities where the basic infrastructure has been taken care of. Afterall who wants to go through the stress of supervising a house building project to make sure the builders are not stealing your cement? You simply go and look at a completed house and if you like it, you arrange a mortgage to buy it.

Your mouth dey sweet gan. But you never talk the problems wey this thing go face for Nigeria because I know say our specialty na to spoil something

I am worried that we don’t have the skilled labour to roll out mass housing in Nigeria so we might have to import people from China and Togo. This is already happening. Housing policy is also a very complicated thing that there are so many things that could go wrong. For example there is a Foreclosure Laws Bill that has been gathering dust in the NASS for a while now. Right now, it can take more than a year for a bank or mortgage lender to be able to take back a property when a borrower doesnt pay. This bill is supposed to simplify the process and make it easier but it is yet to be passed. When someone doesnt repay their mortgage, they are effectively denying someone else the chance to get a mortgage.

There is also the question of costs. A 3 bedroom house is estimated to cost $50,000 to build in Nigeria while the same thing costs $26,000 in India.

But Aliko na dem friend na. Make dem tell am make e reduce the price of cement. E no get where dem dey meet?

Yes, Nigerian cement is very very expensive which contributes to the problem. But Dangote and other cement producers will make a lot of money if housebuilding really takes off in Nigeria. So prices will have to come down through competition or something.

But my mind dey tell me say Naija land use wahala go make this thing hard pass how e suppose be

Yes, it’s going to be tricky. Under Nigerian law, all land since 1978 belongs to the government. An individual can only have right of use or occupancy. This raises an interesting scenario where after paying the mortgage, you own the house but you technically don’t own the land on which it sits. So in theory, one day government can come and tell you to carry your house away from its land.

So there are a lot of issues to be dealt with but as I have often heard you say, at all at all na him bad pass so maybe we need to start this so that the problems can manifest themselves and we deal with them. It’s worth noting that the government is not doing this alone – people like the World Bank, IFC and DFID are involved and providing a lot of technical support so fingers crossed we should have some kind of progress.

Time don dey go but e get one last question wey I wan ask and e dey very important. How this NMRC go take arrange Omo Onile boys make dem no scatter this policy?

That’s a good question. Let me get back to you on that one.



19 thoughts on “Mortgage Sturves: A Conversation

  1. Thanks, this is indeed educative. I heard about the world bank loan for housing and was wondering exactly how it would work. Now I have a better understanding. I pray this works, especially in a place like Lagos, it will push down the cost of over-priced houses and rents.

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  3. I think this is one of the few times the GEJ admin seems to be getting it least on paper.i jus wonder about the other werey governors wey refuse to sign up to this deal,dem no wan beta for dia own people?…but I get question,sorry am not a finance person at all at all,pls where does this leave the fed mortgage bank?what exactly was the role of that bank sef cos I no know till today.thanks feyi for this post,I would Neva av understood it this much without ur dissection in layman language.i owe u 3 bottles…lol

    1. Only Feyi no go fit finish 3 bottles o!

      On another note, Feyi thanks for this educative post. I still think there are a lot of grey areas in this policy. The whole credit rating thing of prospective house owners is still an issue (the targetted middle class is more fragile than often imagined),not forgetting Omo Onile and its incarnates in different parts of the country.

  4. Good write-up, FF! I especially like the conversational style of getting the point across… Pidgin English Bros, odikwa very funny….

  5. Cautiously optimistic. A step in the right direction no doubt. I get very nervous about long term initiatives originating from a Nigerian government. The example I often give is that can we really wholeheartedly trust a government that has been shown to be chronically dishonorable enough to tear up long standing agreements with a critical body like ASUU with 20 year initiatives like the one being touted here? The long term sincerity of the government therefore remains to be seen.

  6. LOL!! I love this dialogue…way to break it down.

    “We will also have to ensure that the money is actually used for mortgages because some people might be tempted to pull a fast one with the cheap money and divert it to something else. Also, we will need to make sure housebuilding is not concentrated in the ‘luxury’ end while ignoring the affordable side of the equation needed to house as many people as possible.”

    This is always my fear with any half way decent plan about Nigeria. Hopefully, they figure this out and do it right…i’m nervous.

    Meanwhilly…any free entrepreneurial/business ideas one can tap into in this industry…yaknow, get in early?? *wink* 😀 #olivertwist

    Thanks for doing your bit, man. Your write-ups are always a great read.

  7. sounds very workable……but my question will be how do you in cooperate the millions of Nigerian who don’t have stable income and the so many who are currently buying or paying for a property with estate developers

  8. A 15 percent mortgage interest rate is still incredibly steep, imagine paying that over 20 years, you will literally be working for the bank/Nmrc during that period and probably repay the principal several times over!
    Interestingly, its probably cheaper to pay a 20% interest mortgage over a shorter period (say 5-10 years) than a 15% interest mortgage over a long period (20 – 30 years) so not sure if this is at all a good idea, certainly won’t cheaper over the long term for the mortgage holders.. guess we’ll just have to wait and see the nitty gritty details when it kicks off, but i have to say its already not looking too good..

  9. Funny people with funny ideology.

    I don’t doubt Nigerians when it comes to making profound submissions and paper works but I doubt when it comes to implementation.

    Nigeria we hail thee…

  10. First, kudos on the blog. Stumbled on it a few weeks ago and read the entire thing over 3 days. Well reasoned posts.

    Enjoyed this post as well. One quibble. You mention overheating which I agree with you occurs a bit too frequently in real estate markets, but you seem to gloss over it’ s danger in a market like Nigeria’s.

    The frenzy you mention shows up superficially in the oversupply of housing against the demand for housing, but at its core it is really an oversupply of risk due to a mispricing of that same risk.

    Classic agency and information asymmetry problems between the banks and NMRC. NMRC offers a guarantee and offers to buy a class of mortgages (setting a floor price to the risk), banks go out and make a whole bunch of dodgy mortgage loans backed either by dodgy debtors or dodgy assets or both. Especially in a market like Nigeria’s where demand for housing so far outstrips supply, any risk mispricing problems will scale mightily and fast. And soon NMRC is sitting atop a whole large pile of dross.

    Agree with the “have to start somewhere” sentiment and that done right, this policy is a game changer. But knowing our banks and their risk management infrastructure, our foreclosure laws (which you mention), corruption and the ease of manufacturing a paoer trail for anything -there are some accompanying steps that would be good to know are happening alongside this policy.

    Welcome your thoughts on this. Very substantive blog, glad your posts are getting the attention they deserve.

    1. Sorry for the delayed response.
      I didnt mean to gloss over it…the risk is very real.

      I reckon this thing wont make much of a difference in the end. It’s certainly not what will get us to where we need to get to.
      Given that the banks need to hold at least 15% of the loans I reckon this will crimp the market somewhat.

      Long story short, where we once had 1 mortgage, I think NMRC will give us 3. And when you think about it, that’s going to be negligible

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  14. Poignant conversation to illustrate the Nigeria Mortgage Refinance Company and its paraphernalia. one thing though, you did not tell Lepa the names of these 14 states that have agreed to run with FG on this.

    1. I was hoping you won’t notice 🙂
      Problem is even the FG hasn’t told us who the states are.
      The only state I know for sure is Anambra. I think Gombe too.


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