Rethinking Nigeria’s mortgage model to tackle a housing crisis

A mortgage is an agreement (contract) between a mortgagor (borrower) and a mortgagee (lender) that gives the lender the right to take the property of the borrower (mortgaged property) if he or she fails to repay the money he or she has borrowed plus interest. Mortgage loan is used to buy or build a house. It is a legal agreement by which a building society or mortgage bank or housing cooperative lends money at interest in exchange for taking title of the debtor’s property with the condition that the conveyance title becomes void upon the payment of the debt. Mortgage loan is different from commercial loan taken with a property used as collateral/security (mortgaged property). A mortgagor is not a businessman but an individual who wants to procure a home as a basic need.

Adam Smith mentioned in his treatise that there are three basic needs of man: food, shelter and clothing. This is why all governments are interested in housing their citizens. Mortgage system is a social aspect of housing provision as a non-commercial arrangement. The first mortgage bank in Nigeria is the Federal Mortgage Bank of Nigeria (FMBN) which was established in 1977 to replace the Nigerian Building Society (NBS) that was established in 1956. FMBN was the only mortgage institution in Nigeria between 1977 and 1985 when the administration of General Ibrahim Babangida licensed primary mortgage institutions with the aim of providing homes for the citizens of Nigeria. The major bane of these primary mortgage institutions is inadequate funds to operate as housing providers.

Elvis Presley once sang, “Home is where the heart is” and Professor Babatunde Agbola of Centre for Urban and Regional Planning, University of Ibadan, stated that, “housing is a bundle of joy.” But, except where the government has legislated housing to be a social service to the citizens like Finland, not everybody will have his or her own property (become landlord). Mortgage loans, like any other loan, are conditional. You have to meet some conditions and tick the checkboxes before you can be qualified for a mortgage loan. A mortgagor in Nigeria must be eager to own a house; must have regular income; must have an account with a mortgage institution; must have at least ten percent (10%) of the cost of the property in his or her bank account etc. Mortgage is a popular and effective means of acquiring properties in the United Kingdom (UK), France, Canada and the United States of America (USA). In these countries, mortgage loans are strictly for procurement of properties.

In the UK, a first-timer mortgagor is entitled to get a 5-year fixed premier standard mortgage loan at 2.51 percent initial rate and followed by 4.04 percent variable rate (2022 rate) because the first home a citizen gets is his or her basic right. Any other property acquired after the first property has been acquired is called an ‘investment property’. While interest rate on mortgage loans is usually fixed at one digit, interest rate on loans for the procurement of investment property is at commercial rate because investment property is a commercial venture. It is pertinent to emphasise here that mortgage loan is not another business loan but a child of necessity to ensure that the low income-earners of the society can own their houses as a basic need with less than commercial rate loan. In Nigeria, the mortgage rate is between 16 percent and 19 percent irrespective of whether you are a first timer or veteran property investor!

There are currently over 200 significant separate financial organisations supplying mortgage loans to house buyers in Britain with Lloyds TSB Bank (Mortgage) and Nationwide Building Society having the largest share of the market. In America, the five biggest mortgage companies are Quicken Loans, United Shore Financial, Freedom Mortgage, Wells Fargo and LoanDepot. Fannie Mae (the Federal National Mortgage Association or FNMA) is a government-sponsored enterprise (GSE) established in 1938. Freddie Mac (Federal Home Loan Mortgage Corporation or FHLMC) was chartered by the US Congress in 1970 to keep money flowing to mortgage bankers (primary institutions).

Fannie Mae exists to expand the liquidity of home mortgages by creating a secondary mortgage market. It provides liquidity to the single family market by purchasing and guaranteeing mortgage loans made by lenders and issuing debt securities and mortgage-backed securities that attract global investors to finance housing in the USA. Fannie Mae buys mortgages from larger commercial banks, while Freddie Mac buys from smaller banks. It is also noteworthy to mention that the employment rate in a country is directly related to the success of mortgage operation. Also, the government fiscal policy committee controls mortgage interest rates. The low interest of mortgage loans is based on the fact that property is a less volatile investment.

Refinancing your mortgage allows you to pay off your existing unfavourable mortgage and take out a new mortgage on new terms. You may want to refinance your mortgage to take advantage of lower interest rates, to change your type of mortgage, or for other reasons. Mortgage industry success is a factor of the advancement of an economy. While the mortgage industry is thriving in advanced economies, it is struggling in Third World countries. This is partly because of the high cost of funds and high cost of building materials. The high unemployment rate is inimical to mortgage operations anywhere in the world.

The reasons why mortgage industry is not successful in Nigeria are: tradition and culture: – like it is the trend in Islamic nations, most prospective home buyers in Nigeria do not subscribe to the idea of getting loans to buy their properties just like most Muslim faithful, because mortgage is interest bearing (Haram). Only few Nigerians do and your neighbours do not see it as an achievement when you get your house/s with loan; corruption rate is high and most prospective buyers of houses prefer to fund their purchase with proceeds of corruption instead of mortgage loans or they wait endlessly for favour of God; the nature of our financial industry does not allow single digit interest rate for home acquisition; majority of Nigerians are poor with Nigeria being the capital of world poverty. It is therefore not easy to use loans to finance low to medium income earners’ homes in Nigeria (Professor Gbenga Nubi, 2015: “Beyond Brick and Mortar”).

An average Nigerian cannot get regular income to pay back a mortgage loan and that is why the rate of mortgage repayment default is high. There is also poor data management. Mortgage systems which have different interest rates between first timer and second timer depend on efficient data management in order to succeed. Housing policies are cultural. The financial status of the masses and the economic situation will determine the type of measures to be used to solve a societal challenge. To resolve the housing crisis in Nigeria, the government should consider social housing, subsidies for low-income earners’ homes and ensure the unemployment rate is reduced. From the above, we can see that mortgages are better provided by private lenders with government regulations. Federal Mortgage Bank of Nigeria (FMBN) will be better if restructured as lender to lenders (primary mortgage institutions) and not directly to home buyers. Mortgage rate should be kept at below 7% due to the high housing deficit in Nigeria and the loan must be effectively monitored so that it is used specifically for housing.

Olufemi Adedamola Oyedele, MPhil. Construction Management, managing director/CEO, Fame Oyster & Co. Nigeria, is an expert in real estate investment, a registered estate surveyor and valuer, and an experienced construction project manager. He can be reached on +2348137564200 (text only) or femoyede@gmail.com