opinionBy Sam Odia
"Let us begin to run with our well enunciated programs, aimed at unleashing a housing revolution in Nigeria, with the overarching goal of ensuring that all Nigerians own or have access to decent, safe and sanitary housing in a healthy environment, with infrastructural services, at affordable cost, with secure tenure..."
Last week, we said that it appeared that definite signs were beginning to emanate to confirm a measure of progress in the housing sector. We began to look at the Financial Sector Strategy 2020 (FSS2020), which forms the plank to most, if not all that we might see unfolding in the housing sector over the next few years.
Because mortgage finance is seen as being a key driver of the financial system, substantial emphasis has been placed on the rapid development of the housing sector. The FSS2020 seeks to use the mortgage market as a major agent of positive social and economic change by making mortgage finance available and affordable to all classes of Nigerians: a strategy crucial to the success of the President's transformational agenda.
A series of key initiatives have been adopted, including amongst others, a review of Nigeria's legislative landscape to ensure the appropriate laws for unleashing the housing revolution are in place and a creation of a broad coalition of stakeholder institutions, groups and individuals for the development of the housing market.
But according to a World Bank report carried out to give support to the FSS2020, the action points of the FSS2020 tend to overemphasize institutional and legal changes rather than simpler administrative measures and while a number of changes in legislation are desirable, according to the report these are not essential in the short-term and should not deflect from the need for the more important process of effecting administrative changes and reductions in land fees and charges.
The World Bank report (which we shall ostensibly be restating in this article) makes a five-point recommendation for the first phase of a reform agenda, all of which can be implemented within a year or two without legislative changes:
1. Substantially improve the registration process by reducing the time taken to achieve the necessary consents and reducing the costs from the current 20-30 per cent of the value of the property to nearer 5 per cent in line with international norms;
2. Either abolish the National Housing Trust Fund (NHTF) as a whole or significantly reform it so as to redress the balance between contributors and borrowers;
3. Substantially increase the capital requirement for Primary Mortgage Institutions, and make loans through the NHTF only to those that meet this and other standards;
4. Put the FMBN on a stable financial footing and develop its facilitation role;
5. Implement a simple mortgage liquidity facility, potentially through the Federal Mortgage Bank of Nigeria.
The phase 2 measures are those that are not essential to stimulate the market and which would take longer to put in place, in some cases because of the need for new legislation. They are:
1. Put in place arrangements to allow covered bonds and mortgage-backed securities to be issued.
2. Reform the arrangements for foreclosure.
3. Develop a mortgage insurance program.
4. Introduce some common standards for underwriting and for documentation.
5. Remove the need for Governor's consent for land transactions.
6. Introduce large scale land registration programs and facilitate the acquisition of title by existing occupiers of property.
7. Introduce a comprehensive suite of training programs.
8. Regulate the activities of real estate agents.
9. Introduce comprehensive building codes and provide protection for buyers of houses during the course of construction.
It is important to note that Nigeria has experienced rapid urbanisation; nearly 50 per cent of the population lives in urban areas compared with just 10 per cent in 1952 and 38 per cent in 1993. There is said to be a shortage of 12 to 16 million housing units. House and land prices are very high. There is very little construction of houses in the formal sector for lower and middle-income groups. Over 80 per cent of the population lives in informal settlements in the major urban areas or traditional villages. Housing in this sector is built by the owners, in some cases overnight in poorer slums, while more substantial dwellings can take ten or more years to complete.
The Land Use Act 1978 vested the ownership of all land in the Governor of each State. Therefore, Governors allocate land for development. All transactions in property require the consent of Governors and registration with land registries. The process is time consuming and very costly, total fees being in the 20 per cent to 30 per cent range.
There is a network of Land Registries in each State but the administration is poor and computerization has made little progress in most states.
While there is a culture of repaying debts and mortgage arrears seem low, the foreclosure procedures are cumbersome and slow. Given the difficulties of the judicial process, lenders use a number of devices including a power of sale which provides limited rights to the borrower and is at times enforced with some degree of brutality.
The environment for mortgage lending is not good, primarily because of the absence of clear property rights, the requirement to obtain Governor's consent to each transaction, inefficient land management systems and high costs of property transactions. There are also constraints on the development of land. Most transactions are in undeveloped plots rather than on completed dwellings.
There is a reasonably efficient and rapidly growing mortgage market comprising loans made by banks at variable rates of interest. There is no ability to underwrite borrowers and accordingly lenders require the borrower to make mortgage payments through salary deduction. Total outstanding mortgage loans are probably around â,ÂÂ¦100 billion ($850m). The vast majority of lending is done by banks, with Primary Mortgage Institutions taking a very modest share of the market.
The open market mortgage rate is 17 -23 per cent, probably a reasonable spread over the cost of funds in the money markets, which is 13 - 14 per cent. Various devices are used to circumvent the lengthy procedures for registering property and also to avoid the high costs.
The Federal Mortgage Bank of Nigeria (FMBN)
The Federal Mortgage Bank of Nigeria (FMBN) oversees a subsidized mortgage scheme. The Bank has a number of other responsibilities including re-financing existing mortgages. It has yet to engage in secondary market operations.
The National Housing Trust Fund (NHTF) is a compulsory provident scheme, the proceeds of which can be used only for house purchase. 2.5 per cent of employees' wages are deducted and paid into the fund. After six months contributions, members are entitled to a 5 million ($43,000) loan at a rate of interest at 6 per cent for 30 years. The scheme is in effect a compulsory regressive tax and is also incapable of working in practice because of the mismatch between assets and liabilities. In practice, many people do not make contributions and so far less than 5,000 loans have been disbursed.
Primary mortgage institutions are intended to be specialists in mortgage lending, like British building societies or Mexican Sofoles. Their primary role is to disperse loans funded through the National Housing Trust Fund. There are about 90 PMIs but most are financially weak and collectively they are small.