Housing plays a special role in the social, political and, more importantly, economic dialogue in most societies. Housing has been known to be a major component of creating stable and healthy communities and it is often the largest single category of household expense. For housing to be successful, a country needs to have a stable macroeconomic environment. Moderate to high inflation rate and nominal interest rates as witnessed in Nigeria are typical features of volatile economies. These features have strong effects of reducing the affordability of mortgages. A volatile economy also affects the supply of funds and the types of mortgages offered by lenders. In such an environment, lenders are concerned about liquidity risk and reluctant to offer long-term loans. The solution to this then becomes government’s strong institutional intervention in terms of favourable policy drafting and implementation. The coming on board of the Nigerian Mortgage Refinance Company (NMRC) is a commendable step towards scratching the surface of this challenge.
Another distinguishing characteristic of housing finance is the ability to mortgage the property to secure the loan. This means that the land laws and processes (title registration, foreclosure laws, etc.) have to be put in place to allow enforceability. An accurate and comprehensive land registration system is a necessary condition for effective property rights. This is largely absent in Nigeria. However, it is important to mention that a few states have begun to address this problem through the setting up of several land registries at the state level. It is pertinent that the states are encouraged to get these initiatives to a cruising altitude. At the Federal Mortgage Bank of Nigeria (FMBN), tireless efforts are being made to also contribute to solving this problem through the bank’s centralized repository land and assets registry system. At the federal level, creating or sponsoring a Mortgage Electronic Registration System as is done in the United States and other emerging markets will also help to increase the ability to mortgage properties.
There are a whole lot of other risks and challenges associated with housing provision for the low and medium income earners. They include credit risk; liquidity risk; and cash flow risk. Information on borrower credit history is an important component to mortgage underwriting and credit risk management. Mortgage lenders rely on credit information compiled by efficient credit bureaus to ascertain a borrower’s track record of handling credit. Liquidity risk is the risk that money may be needed before it is due. A lender that is faced with short-term and unstable sources of funds may not be able to package mortgages due to the risk that it cannot meet its cash flow needs. Cash flow risk is related to uncertainty with respect to inflation, real interest rates and exchange rates. It encompasses what is usually called interest rate risk and prepayment risk (Lea 2005). Cash flow risks are characteristic of macroeconomic environment and types of mortgage instruments available.
We have examples of countries like Mexico, Brazil, Egypt, Morocco, Singapore, Malaysia, India and Thailand that have become first-class models of emerging economies that have developed sound housing finance systems that overcame all these challenges and mitigated these risks. These countries were worse off than Nigeria at some point as it concerns housing its citizenry. But high level of professionalism and strong political will witnessed in their housing sector has made them succeed.
In all countries of the world, formal sector financial intermediation can only exist with support of some government intervention. Government may intervene through enhancing a legal system of enforcing private businesses or may even operate or be a significant player in the primary housing finance system. Today, countries enjoying very high level of housing finance systems are the ones that have created sound enabling environment for the private sector (except Thailand whose Government Housing Bank is a world-class model of direct government involvement in lending to the individual through the primary lending model).
What has happened in many emerging economies all over the world is that the government of the day has hired housing experts and policy analysts (strictly on professional basis, devoid of political gimmicks) to devise ways to overcome housing challenges in their countries knowing how significant housing is to a nation’s GDP. Recent examples include India, Mexico, Jamaica, Malaysia, Brazil and Thailand. These countries have deployed strategies and models ranging from home loans guarantee, mortgage insurance, liquidity facilities, pass-through mortgage-backed securities, tax credit for low-income housing, seed capital, hedging of foreign long-term debt for private market operators, etc. While not recommending a direct transfer of these models, a critical look at them in relation to our internal environment will help a great deal. More importantly let our policy analysts and leadership get to work rather than play lip service.
In Nigeria today, what we need in policymaking are housing specialists who have the requisite knowledge and competence and not just political figures who do not understand by any means the role of housing in an economy. With a population of over 170 million people, a good, sound and smart team of policymakers with leadership (not based on geopolitical zones) will boost the housing and housing finance market. The forward and backward linkages of a viable housing industry are obvious. Let me not even go into that area. But what I must mention is that with such a population, and still growing, Nigeria faces significant challenges in both its present and future housing stock requirements.
PS: The original version of this article was first written in 2005. An updated version was published in 2011. This latest piece was written in July 2015.
Roland Igbinoba
