Based on information from a pre-bond-listing prospectus, the NMRC is about to raise its first series of financing from the debt markets to initiate the process of refinancing eligible mortgage lenders. Starting off, it is going to refinance 577 legacy mortgages created by 9 eligible banks.
Asides the obvious benefit of boosting the cash flows of the participating banks and arming them with funds to create more mortgages, the less apparent benefit is in how the game of mortgage origination has been raised, both in terms underwriting standards, and in eliminating some of the major risks that have plagued the quality of mortgage assets and made them unattractive to investors.
The loans that go through the NMRC and end up in its mortgage portfolio is seen to be of higher quality because of the more rigorous underwriting standards which the participating banks are made to adopt in creating them.
They are also of higher quality because traditional risks associated with mortgage in Nigeria have been substantially reduced. The most significant is in pushing foreclosure laws in the states so that investors can recoup their investment when there is a default. Mortgage borrowers are made to accept that property dispute resolutions go through a different arbitration process that sidesteps the traditional courts. This allows property disputes to be resolved in record time, and foreclosures to be done much quicker.
This means that in coming to the market, the NMRC can to an extent, assure investors of the quality of the underlying assets.
For banks that are participating in the NMRC scheme, some form of housekeeping has been done as they are now all made to adopt the Universal Underwriting Standards.
More rigor also goes into the selection of borrowers because borrowers are made to go through pre-qualifications to be considered for lending.
This has ushered in a new level of confidence in the mortgage assets that are being generated by the banks and being adopted by the NMRC.
Because 3rd party investors have more reason to be confident, new doors are now being opened for the NMRC and the housing finance sector.
There is enthusiasm from potential bond investors, according to NMRC boss Charles Inyangete.
Part of the new doors include the N200 billion Cantor Fitzgerald investment announced in March.
This is significant because Cantor Fitzgerald is a big player in the world of international finance. It is one of only 22 primary dealers authorized to trade US government securities with the Federal Reserve Bank of New York. It was the world’s 1st electronic platform for US government securities, and became renowned for its computer-based bond brokerage and the quality of its
Institutional distribution business model (it can distribute investment products to institutional investors all over the world).
Its initial investment alone is worth about 70% of the market cap of Nigeria’s listed mortgage firms (as at 2013 FY). But additional to its monetary investment, the industry stands to gain from Cantor Fitzgerald’s expertise in the generation of Asset (mortgage) Backed Securities (ABS) and fixed income trading. Cantor Fitzgerald specializes in the creation of new-issue securities.
Securitization of mortgages is seen as the final piece in the mortgage puzzle.
With the ability to create ABSs out of mortgages originated by Primary Mortgage Banks (PMBs), PMBs can be further re-financed for the mortgages they originate, and as such, maintain the cash flow needed to originate more mortgages.
This means that mortgage banks can potentially be refinanced on two fronts. Through the NMRC bond proceeds route, and through Asset Backed Securities.
This will mean that a surge in 3rd party financing could be looming, and that emphasis in the near future will be on how much of those mortgage assets 3rd party investors can lay their hands on. Demand for mortgage-backed assets could soar.
There will be demand to feed in mortgages into the mortgage pool of the NMRC for refinancing via the bond sale, and there will be demand to feed mortgages through to the ABS securitization vehicle for on-sale to 3rd party investors. The mortgage bank with the ability to create the most mortgages will benefit the most.
So, which are the mortgage firms that create the most mortgages in the country?
NMRC’s current mortgage portfolio paints a very clear picture. The mortgage industry is dominated by 2 financial institutions. Aso savings and Stanbic IBTC, both of which account for over 60 percent of eligible mortgages in the Series 1 tranche.
To paint a better picture, in 2013 (for the sake of conformity), Aso accounts for about 40 percent of industry valuation on the exchange (by sales) among the listed mortgage banks in the NSE, with total assets standing at N87 billion. The second placed mortgage firm Building society) stood far apart with total assets at N14 billion.
In terms of mortgage lending in that year, Aso made mortgage loans valued at N21 billion. Stanbic IBTC made mortgage loans of N8.7 billion, while the second largest mortgage (Abbey), made mortgage loans of N6 billion.
