ROLE OF MORTGAGE BANKS TO ECONOMIC DEVELOPMENT OF NIGERIA
INTRODUCTION
A
mortgage is a way of amortizing or paying off a loan over a fixed period with a
series of regular payments (Brown and Matysiak, 2000). It may also be seen as a
conveyance or other disposition of land designed to secure the payment of money
or a discharge of some other obligations. The Housing Handbook (1991), defines
mortgage as an instrument recognized by law, by which property is given up as
security without necessarily giving up its possession for the repayment of a
debt or obligation Many kinds of property can be mortgaged and in the category
of property that can be mortgaged are chooses in action, contingencies, future
book debts and mere expectancies that are valuable. An established and virile
mortgage institution has an important role to play in a country in the
stimulation and generation of loanable funds for housing and real estate
development. Credit is frequently specified as the ‘life blood of real estate
business.’ The terms and availability of finance to a large extent determine
the trend of housing development in any area.
NATURE OF A MORTGAGE BANK
The
borrower is referred to as mortgagor while the lender is known as mortgagee.
Loans secured by a mortgage over landed property are long-term mortgage loans
which are generally made by a building society, savings and loans association,
pension trust fund or Life Insurance Company.
If
a mortgage is to occur, a mortgage deed is prepared in which the mortgagor
agrees to interest on a loan at a specified rate and the deed includes some
express statements as regards property insurance, maintenance and repair, etc.
There are basically three types of mortgage loans namely – social, economic and
commercial loans all of which have different lending terms with reference
to: Income groups : low, middle or high
Types
and size of dwelling unit
Tenure
of dwelling unit
• Rate of interest
• Service charge
• Personal stake
• Repayment period
• Non-residential development
METHODS OF REPAYMENT
There
are three well recognized methods of settling mortgage loans. They include: I.
Installment method: This allows the borrower to repay a fixed amount of
principal each month in addition to interest in actual balance of the loan
which is outstanding. Both principal and interest will gradually fall during
the life of the mortgage.
Annuity
method: In this method, at intervals throughout the period, equal payments are
made covering both repayments and interest. As each interval passes in this
method, the amount of principal in each payment increases and the amount of
interest decreases.
Sinking Fund method: In this method, payments
are made periodically not to the lender but into a sinking fund. The payments
are such that they will accumulate to the amount of the loan at the end of the
period when the loan can be discharged in a lump sum. Since there are no
payments to the lender, the debt is not reduced year by year and interest each
year is paid on the full amount of the loan. This method is used wherever
repayment by installment or annuity s not being resorted to and provision is
required against the need to repay a lump sum in the future.
HISTORICAL BACKGROUND OF MORTGAGE
BANKS
In the beginning, a mortgage was just a
conveyance of land for a fee. The buyer paid the seller a set rate, with no
interest, and the seller would sign over the land to the buyer. The classical
form of real estate debt is the mortgage, a loan secured by real property as
collateral. The word ‘mortgage’ comes from two middle English words (which are
actually French in origin): “gage” means an obligation or commitment, while
“mort” referred to death or dying. Hence mortgage was a “dying commitment” that
is, a commitment that was not permanent but had a finite lifetime. During the
medieval period, land was the direct source of most wealth, as a pledge of real
property was the guarantee to secure mortgage. This old arrangement in the view
of Barker 2006, was however very lopsided in that the seller of the property,
or the lender who was holding the deed to the land, had absolute power over it
and could do whatever they liked, which included selling it, not allowing
payment, refusing payoff, and other issues which caused major problems for the
buyer, who held no ground at all. Mortgages have ultimately evolved into many
different forms all over the world; they are still fundamentally the same essential
contract that they were in the beginning. Now, there are many more laws and
regulations to help protect the buyers, sellers, and creditors.
Housing
represents one of the most basic human needs and has a profound impact on the
health, social attitudes and economic well-being of the individual. It is a
barometer for measuring a person’s standard of living and place in society.
Housing also constitutes the highest investment an individual makes in his life
time and costs several times his annual salary. This implies that one must save
and or be assisted to own one. The house an individual lives in is a symbol of
his status, a measure of his achievement and social acceptance, an expression
of his personality and the barometer that seems to indicate in a large measure,
the way the individual perceives himself and how he is perceived by the larger
society. It is the measure of all the good (or bad) things in life that will
come to him and his family (Agbola, 1995). Also the importance of housing in
human development has been well documented by scholars. The positions of
scholars vary depending on the aspect of housing each one delves into. Omirin
(1998) researched into land accessibility and low income house building in
metropolitan Lagos. Based on the analysis of house builder’s behaviour of
selected low-income earners of Lagos it was stated that it is a wrong notion to
continue to rank land accessibility as one of the greatest constraint of house
builders. Omirin stated that lack of finance and escalating cost now takes
precedence over land accessibility. Williams (2002) in his study stated that
access to shelter produced by public agencies continue to elude the urban poor
who simply cannot muster the financial resources required to procure these
housing units. Jaiyeoba and Amole (2002) examined the appropriateness and
socio-economic implications of low-income housing delivery as supportive rather
than a provider approach. They stated that what is required is the
determination of the extent to which the low-income groups require support.
Olusola, Aina and Ata (2002) identified lack of soft loan as one of the major
obstacles against urban housing production in Nigeria. It is clear from the
foregoing that finance is a major factor in housing delivery. Also from these
recent studies it can be observed that none has specifically examined the role
of housing financial institutions in housing delivery and that none
specifically has delved into the role of Primary Mortgage Institutions (PMI’s).
This study therefore investigates the problems of PMI’s in housing finance in
Lagos. The situation in the rural area is even worse where the quality of
housing is very poor and very low in quantity. Infrastructure like power,
roads, water, drainage and every other constituent of housing is readily
unavailable. There is nowhere in Nigeria where the failure of housing is more
manifest than in Lagos in spite of the commendable effort of the State
Government. One reason is the difficulty of assessing land by a majority of low
income earners as developable land is scarce due to high cost of reclamation of
the swampy terrain of Lagos. The population of Lagos is currently estimated as
15 million persons up from a mere 267,000 in 1952 and growing faster than the
national average rate due to immigration of people flocking in on daily basis
looking for employment. In order to meet the growing demand, the Association of Housing Corporations of
Nigeria estimated on the basis of the recent population census that at least
200,000 dwelling units should be provided annually throughout the federation
and that government authorities should produce at least 10,000 housing units
annually. Yet there is evidence that nothing near this target is being built
each year either by Government, Housing Associations or by private developers
in Lagos
ROLE OF MORTGAGE BANKS TO ECONOMIC
DEVELOPMENT OF NIGERIA
There
are three stages to the evolution of mortgage institutions in Nigeria. They are
the colonial (pre 1960), post colonial (1960 - 1985) and era of deregulation
(1986 - present). I. Colonial era re 1960): The concept of mortgage financing
in Nigeria dates back to the colonial era when Colonial Development Corporation
which later changed its name to Commonwealth Development Corporation (CDC) was
established. At that time such institutions aimed at providing funds for civil
servants to build their own houses. Many of these never took off from the
drawing boards. The few that had managed to come into existence then proved to
be big failures as they never achieved the objectives for which they were
established. It was not until 1956 that the first Nigeria market was
established with the introduction of Nigerian Building Society (NBS), to
provide mortgage loans to deserving Nigerians. It had a share capital of N2.25
million as a joint venture between the CDC, Nigerian Government and the former
Eastern Region. CDC had a controlling 90 percent equity participation while
others shared the remaining 10 percent (Nwaimo, 1991). They operated two branch
offices in Lagos and Enugu.
In
the same year, the African Staff Housing Fund was introduced by the then
colonial administration headed by Sir Oliver Lytleton. The fund was meant to
encourage civil servants to own their houses. All these measures failed the
Government simply because there were no available property markets then; as the
regional capitals of Lagos, Ibadan, Enugu and Kaduna lacked the population
concentration that would make a market. People at that time neither bought nor
sold properties. II. Post colonial era (1960 - 1985): This era saw an increase
in mortgage activities as a result of urbanization engineered by the creation
of new states especially in 1967. When the Nigerian Building Society (NBS) ran
only the Lagos and Enugu offices, it depended on savings from the public and
funds from the CDC itself. But there was no way CDC could generate savings
enough by itself to meet demands in Enugu and Lagos. So it thought about
borrowing from external sources. CDC eventually brought in money into the country.
Undaunted with this increase in demand, NBS had to reassess its strategy. The
Government decided in 1972 to buy over the shares of CDC and that provided some
liquidity for the building society. In order to ensure that any developer had
enough funds to complete his development, the NBS increased its maximum lending
from N24, 000 (12,000 pounds) to N 36,000 (l8, 000 pounds) for any single
application (Nwaimo, 1991). The essence was to accommodate the increase
occasioned by the Udoji Award. It would be realized here that as there was an
increasing demand in absolute terms by average Nigerians to build their own
houses, there was no equivalent inflow of resources to NBS who had to charge
lower interest rates on their loanable funds which was uneconomical as a means
of attracting funds from the financial system to the Building Society. This
started the genesis of funding crisis for the housing system. As the demand for
housing finance increased, there came the scarcity of construction materials.
This spurred the building society or the housing finance institutions into
finding new financial instruments to meet demand or to attract funds by way of
selling bonds, taking debentures, etc. In the third National Development Plan
(1975 - 1980), the Federal Government developed the idea of housing for every
Nigerian. It recognized that wherever any Nigerian is he must be encouraged to
have access to housing finance. This led to the establishment of the Federal
Mortgage Bank of Nigeria (FMBN) backed by Decree No. 7 of 1977 with an initial
capital base of N20 million and by 1980 expanded to N150 million with 60 and 40
percent equity ratios held by the Federal Government and the Central Bank of
Nigeria (CBN) respectively (Nwaimo, 1991) . Since then, the FMBN operated in all
states of the federation. It also had the same problem encountered by NBS,
where available funds proved inadequate to meet the relatively high rate of
demand for housing finance. During Obasanjo's civilian regime, the commercial
banks in addition, were to make available under the Federal Government
guideline, 10 percent of their loanable funds to the housing sector and were
also to make available to the FMBN any unused part of the fund (short fall) so
earmarked. In the first year, the CBN got close to N30 million from the
arrangement. But by 1980 commercial banks and merchant banks legally
circumvented the system by lending to finance housing which they could control.
Hence they preferred lending to choice locations like Victoria Island and
Ikoyi. As far as they were concerned, it was still housing. It never mattered
how many units of housing such loan could fetch. Thus, that source of fund
dried up from the system. In an attempt by the Federal Government to help
salvage the FMBN which was beginning to show signs of financial stifling, it
directed the National Provident Fund (NPF) to lend half a million naira every
month to the FMBN over one year period i.e. $36 million every year. But FMBN
could not pay the interest rate on this which was lower than what the NPF could
get in the financial market. At the end of the first one year period, NPF
failed to renew this arrangement because they were making a loss. The 1980 -
1983 civilian regimes did not bother about financing the housing finance system
but preferred to finance housing construction through the federal low cost
housing system. This discouraged savings from people. All that was needed for
allocation of built houses was to be a Nigerian. Inasmuch as this process
assisted the housing delivery system, so much funds were, however, tied down.
It was nevertheless a negative assistance because it was not encouraging the
inflow of funds into the system because housing here was not adequately funded,
there became a backlog of demand which was compounded by increases in the cost
of construction and subsequently increases in rate of interest. It is pertinent
to add that since the creation of four regions until 1983, State Governments
established many housing corporation that were more of construction companies
than housing finance agencies. Thus, eliminating the prime objective of
mortgage institutions. Era of deregulation (1986 - present): This era marked
the deregulation of the financial market and in interest rates. It affected the
mortgage industry as people decided to build through personal savings
accumulated over the years than to borrow at the prevailing high interest rate.
This trend was, however, restructured with the introduction of the Mortgage
Institutions Decree No. 53 of 1989 and the subsequent National Housing Policy.
The mortgage market is now divided into two tiers viz: FMBN as the apex
(licensing and supervisory) mortgage bank and the second level being the
Primary Mortgage Institutions.
REFERENCES
Ajanlekoko, J.S. (2001) Sustainable Housing
Development in Nigeria-The Financial and Infrastructural Implication, Paper
presented at the International Conference on Spatial Information for
Sustainable Development, 2nd-5th October, 2001,
Nairobi-Kenya
Ajayi, O. (2005) Banking Sector Reforms and Bank Consolidation: Conceptual
Framework, Bullion (A Publication of Central Bank of Nigeria) April-June 2005,
Vol. 29No 2, pp 3-11.
Barker, C.
(2006) A Short History of the Mortgage (Online):
http://ezinearticles.com/?A-Short-History-of-the- Mortgage&id=243834
Betubiza,
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