Speeches

The Launching of The Lagos Mortgage Programme in Support of The Affordable Housing Projects

Oct 24, 2007 - Probably the greatest and most valuable possession a mancan have next to his life is a house. Every citizen deserves decent and affordable housing and indeed, there is a direct correlation between affordable housing and better living standards and quality of life. Access to housing is a key dimension of families’ assets, usually the largest family investment, and a major means for generating employment and stimulating local development.

All experts agree that the provision of housing is a key component of the success and prosperity of developed economies with an average of 35% of economic activity revolving around the housing industry. It is little wonder then
that they have been able to survive rising oil prices, falling industrial out-put, volatile stock markets and rising unemployment. And the key question is: would this prosperity, driven by housing have been possible without the benefit of a modern housing industry supported by a secondary mortgage market? Is any modern society functional without access to housing and consumer credit? Can you truly fight corruption if every purchase has to be ‘cash-and-carry’ and the costs of essentials are more than what the average income can support? The answer to all the above posers is an unequivocal “No!”

And how do countries develop sustainable, viable financial frameworks to support the establishment and growth of a
robust housing industry without the government becoming directly and usually inefficiently involved in the direct
provision of housing?

The US did this in 1913 by the introduction of the federal income tax deductions of mortgage interest payments. And
in the 1930s as part of the “New Deal” Franklin Roosevelt policy response to the depression the Federal Home Loan
Bank System was created along with the establishment of federally-backed mortgage insurance providing liquidity
which ultimately led to the emergence of the secondary mortgage market backed by the Federal National
Mortgage Association (Fannie Mae). It was this government-led initiative that resulted in the economic boom that the US has experienced since then.

The net result has been lower cost per house and a more affordable and stable mortgage ownership with home
ownership at 70%. The provision of housing and all its related economic tie-ins is the cornerstone of the American and
European economies even as industrial output declines or goes off-shore.

If the 1913 US initiative seems too far distant in the past, 1960 cannot be too far away. That is exactly 47 years ago. That was when Singapore started. And my recent visit and meeting with their Housing Board confirms that today 80% of 4.5million Singaporeans now live in their own houses reclaimed from slums worse than Badia, Ajegunle, Ikota,
Bariga and 90% of these houses are funded by mortgages of 30 years now bearing interest between 2.6% -3.5%.
I was fortunate to meet the man behind the success story, Minister Mentor, Lee Kwan Yew, who shared some of the
experiences of the beginning with me in a rare 30 minutes meeting, scheduled at very short notice by my wonderful
hosts. I also re-call that the earliest set of houses built by the LEDB in Lagos in the late 1960s and early 1970s were funded by mortgages. The lesson is that it has been done in recent history and can be done again.

Home ownership rate is Nigeria is put at a probable 25% which unfavourably compares with 70% in the USA, 74% in
Brazil, 80% in Singapore and 56% in South Africa. Our real estate sector and mortgage credit accounts for less than 1%
and 0.5% of our GDP respectively, in sharp contrast to contributions of between 30%-40% in emerging economies
and 60%-80% in developed economies.

The favourable impact of a viable housing market is clear:
• An efficient primary and secondary mortgage system has profound impact on poverty alleviation, improved income distribution, saving culture and responsibility;
• It has a profound role in reducing corruption;
• It enables the lower and middle income families, about 85% of our citizens to build wealth through home equity
growth (i.e. the difference between the value of the property and how much is owed on it) and thus they can take advantage of credit facilities;
• It deepens the capital market;
• It creates construction jobs and demand for relevantproducts;
• It creates jobs for other professionals like Lawyers, Estate Valuers, Insurance Brokers etc;
• It lowers cost of housing through volume;
• It increases GDP and general economic activity and;
• It improves security of tenure and brings more people into the formal sector of the economy.

Ultimately, for both social and economic reasons, government must take the driver’s seat in the establishment of a viable secondary market supported by strong and efficient regulatory institutions and a very responsive legal enforcement regime that will guarantee protection of the rights of both lenders and borrowers.

Unfortunately in Nigeria, although on paper at least, there are well laid-out housing policies at both federal and state
levels, these have not been effective in providing houses for the ordinary, hard-working aspiring citizens primarily due to
the absence of a strong, predictable financial framework such as a secondary mortgage market and general institutional weakness inherent in the regulatory and legal systems.

Our historical omission of over a quarter of a century to build a strong land-titling system has resulted in lack of access to
formal financial services for the majority of our people. Because most of the populations are forced to exist in the
informal sector, they cannot legally protect their property or use it as collateral to obtain credit thus missing pportunities
to build their businesses and assets. And yet such untitled dwellings, rural property and businesses in the informal or “extra-legal” sector are worth trillions. But, to quote De Sotto, they amount only to “dead capital” because they cannot be amortized into credit flows to boost growth, purchasing power and ultimately national economic output.

We have clearly started the process that would ultimately lead to the development of the titling of every parcel of land
in Lagos in an electronic format by commissioning a team of experts to develop a GIS Base Map for Lagos. The successful implementation of the project would in our moderate view be one of the major legacies we hope to leave behind. Its impact in supporting land acquisition transactions and urban planning and development control which currently challenge Lagos, can only be imagined.

Insecure land tenure is a disincentive to investment. Sound property rights have great advantages. When people are
confident that they will not suddenly be dispossessed they are more inclined to make long-term investments. When
lenders are sure of the security of the borrower’s title they will be more inclined to extend credit. Credit is a major building block of modern economies ensuring long term demand for goods and services, thereby stimulating production and consequently creating jobs and higher economic output.

And the foundation of credit based economies is home equity value structured and traded within a strong financial
framework with both primary and secondary levels and with homes at the core. As Lagos becomes positioned to be the financial center for Africa, and in order to complement the efforts of the Federal Government to make Nigeria one of the 20 biggest and efficient economies in the world, it is imperative for Lagos as the dynamo of the Nigerian economy to have a sound mortgage and home ownership structure.

Most housing and mortgage activities in Nigeria, such as there are, are centred around the relatively affluent people
in the major cities of Lagos, Abuja, Port Harcourt, Benin etc. But you cannot build a vibrant housing industry solely on a
few wealthy people. And considering the extremely high prices of these houses vis-à-vis legitimate or ‘declared’ income, one is entitled to wonder where most of the buyers or builders find the cash to cover the total sales prices to
acquire such property.

Even where mortgage structures are offered, the cost of the initial down payment is prohibitive. Housing for the low to
lower-medium class is provided by slum-lords, housing so poor and under conditions so oppressive that the quality of
life is lamentable. Federal and State governments have always declared the provision of housing as a veritable corner stone of development and have consequently embarked on one program or the other to provide housing or housing loans for civil servants and citizens through housing corporations, staff loans and the direct sale of built-up houses or serviced plots within estates. But these have tended to be too little, of generally low quality (as if low-cost necessarily means lowquality), tied to available funds rather than access to longterm credit.

It has been a ‘fits and starts’ system, victim of flip-flop policy, sudden changes in administrations and inflationary
pressures. Too often, the lack of business models and economies of scale have tended to make these schemes
expensive and inefficient. To compound the problem, such programmes are too often hijacked by the ‘higher-ups’ during the allocation process. Although such houses are generally referred to as “low- cost”, they are still priced out of the reach of their intended beneficiaries. The result is that those for whom the houses are intended as owners, always end up as tenants, paying rent without any equity or ownership because of the cash and carry nature.

Attempts at establishing mortgage institutions have not been too successful either. The Nigerian Building Society was established in 1956 as a joint venture of the Colonial Development Corporation, the Federal Government and the Eastern Regional Government. During the Third National Development Plan, it was converted in 1977 to the Federal
Mortgage Bank of Nigeria (FMBN). Till 1987, the FMBN combined the functions of a primary and secondary mortgage institution and in that year, the Mortgage Institutions Act was passed recognizing the twotier system of housing finance with private sector institutions to handle primary or retail mortgages while the FMBN would operate essentially as a secondary or market support mortgage institution.

However, as usual, government did not adequately fund(fuel) the vehicle and so it could not deliver us to our destination. Global economic depression of the 1980s, political instability and under-funding took its toll. The collapse of financial institutions in the 1990s caused huge financial attrition and loss of faith in the credit system. Our response to the under-funding or liquidity question was the establishment of the National Housing Fund which required contributions from workers in both the private and public sectors earning over =N3000.00 a month with the FMBN as collecting agency. But once again, this institution showed itself incapable of driving the process, ensuring due and proper disbursements and accounting for monies received.

Giving loans directly to individuals to build homes compounded construction risks with mortgage risks. The situation today is not much improved and the low to middle income groups still find it virtually impossible to own a home. I believe it is time for fundamental change, the time to establish a viable secondary mortgage or wholesale market that would buy or guarantee the mortgage obligations from primary lenders; collect the interest/principle payments to maturity; or re-package them as Collaterized Mortgage Obligations (CMOs), Mortgage Backed Securities (MBS) or Real Estate Investment Trusts (REITs); and then resell these instruments to retail and institutional investors through the capital market.

In short, the creation of a viable and sustainable secondary market ensures liquidity of mortgage obligations spreads risk amongst several investors and frees primary lenders to issue more loans. I believe a new approach is needed based on modern financial structures that will enable honest and hard working Nigerians to own affordable and decent homes without the need for graft, unmanageable loans and self-denial on a criminal scale. The ultimate mission being that Government must refrain from direct housing provision in the future except in exceptional circumstances.

Difficult as this may seem politically, government must look at the bigger picture and ignore the short term political benefits of promising what it has not the capacity to deliver. The various governments and public pension funds must
establish themselves in the secondary mortgage market to provide the necessary liquidity, guarantees and support to
primary lenders. Thankfully, a Contributory Pension Scheme funded by Civil Servants and Government as the employer
is now in operation in Lagos.

Governments should not be competing with primary lenders and property developers in the actual delivery of housing as
they have neither the managerial ability or efficiency levels to deliver the kind of capacity that current demand for
housing requires. That is what we intend to do in Lagos. We have chosen to be a government of methods and
critical planning; we intend to solve problems or manage them efficiently and not to conceal or avoid them. What we
are doing today is probably to strike the most devastating blow against poverty in many ways.

First, we are re-valuing the rent hitherto paid perpetually by millions of tenants, starting with our civil servants by using it
to create equity which can be traded on the property in respect of which it is paid. The ability to trade that equity will create credit to support an effective demand for so many services and lifestyle goods. That demand will not only change the quality of the lives of these people, it will, as I said, earlier stimulate production which will create jobs. And we are convinced that the key to ending poverty is to create jobs. Land will be provided in suitable areas and the whole
process of consent will be tied into the scheme and designed in a way that will make it efficient and borrower-friendly. We anticipate that all that the beneficiary will have to do is meet his payment obligations while the system will take care of the statutory requirements in a holistic manner.

In order to set up and drive the system, we have opened a Mortgage Registry and have received support from the judiciary which has set up fast-track Mortgage Divisions in the High Court of Lagos State. These are firsts of their type in the history of our State and Country. Separate Mortgage and Survey Desks have also been created in the Directorate of Land Services. The Desks will be responsible for receiving mortgage related applications and accompanying documents, investigation of status of the lands through charting and processing same for the approval and endorsement of transaction documents by the Honourable Commissioner. The process is envisaged to be concluded between 14-22 days from the submission of complete documentation. While we will start by immediately making our various staff
quarters available to civil servants who occupy them as the pilot to galvanize the Lagos Mortgage Scheme, we say
empathically that the Scheme is open to all and sundry in the private sector who have a job or verifiable means of
income and who meet the obligatory criteria of the participating financial institutions.

Our scheme, seeded with an initial capital/liquidity outlay of N40 billion is for a 25 years-tenure at the rate of 10% per annum. This is also a national first as far as I am aware. With such a scheme, the anxiety of where to live especially after
retirement, that anxiety that is a key contributor to the corruption impulse in the absence of an accessible, affordable, manageable home-credit scheme will be substantially allayed. It is expected that the challenges of the provision of so
many houses will task our creative and entrepreneurial spirit; but it shall also, due to the economies of scale, drastically reduce the cost of building inputs and consequently, the cost of the finished product.

I must commend our partners in the private sector, the banks who have syndicated the seed funds for the faith and trust they have shown in our Government; for their understanding of our challenges and their willingness to partner and pioneer. We drove a hard bargain in the interest of Lagosians, negotiating from 17% to 10% interest rate, calling and
waking up their officers in the dead of the night to review positions. The people of Lagos will be eternally grateful to
you.

For our colleagues in the Public Service who will be the first beneficiaries, I say the future is here now and it is now in
your hands. You cannot lose your home unless you lose your job. You cannot lose your job unless you are dismissed.
You cannot be dismissed unless you corrupt yourself or substantially misconduct yourself. I welcome you to this journey of great expectations to a Brighter and Rewarding Future.

Thank you for listening.

“Eko o ni baje o!”

Babatunde Raji Fashola (SAN)
Governor of Lagos State